Marcial: Hot Stock Bets for 2009

The massive stimulus package bodes well for battered blue chips like AT&T, GE, and Microsoft as well as biotech and green energy shares

By Gene Marcial

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What now, Dow Jones? Without a doubt, the big question confronting investors is whether the stock market has bottomed, with the Dow Jones industrial average recently up some 7% in just eight days after tumbling 36.79% from its record closing high of 14,164.53 on Oct. 9, 2007.

Many analysts may beg to differ, but some savvy strategists assert that indeed the market hit bottom on Nov. 20, 2008, when the Dow finished the session at 7,552.29, its lowest closing since Mar. 14, 2003.

It isn't surprising that investors on the whole are still very skeptical, if not dead set against putting one more dollar into equities because of the devastation of the market, with global financial crises and a deep recession battering stocks.

But whether or not shares have reached a low, investors should recognize that the new year and the forthcoming massive spending from President-elect Barack Obama's recovery proposal bodes well for the market. The ambitious program, set to begin in February, should lift investor and public confidence across the nation. The plan will bolster the economy with huge outlays and should help persuade financial institutions to unlock credit they have restricted so far, helping to boost business spending once again.

Cheap Blue Chips

Certainly there will be doubters, but already many asset managers have been snapping up stocks they expect to appreciate as a result of the Obama program. Some, such as those of companies expected to benefit from infrastructure rebuilding, already have taken off. For instance, since Nov. 20 shares of heavy equipment maker Caterpillar (CAT) have jumped 49%, while tractor maker Deere's (DE) stock has leaped 40%. Steel industry shares also have suddenly boomed: AK Steel (AKS) has jumped 106%, Allegheny Steel (ATI), 88%; Nucor (NUE), 85%; and U.S. Steel (X), 88%. Predictably, shares of companies that supply construction aggregates such as sand, gravel, and stone also have bumped up strongly: Vulcan Materials (VMC) climbed 70%, and Martin Marietta Materials (MLM) 73%. Even so, some analysts believe these sectors have the potential to go higher.

But investors should not be blind to other value opportunities the savaged market provides, largely as a result of enormous government intervention in the financial, auto, housing, and mortgage sectors.

The temptation is for investors to be very conservative in their investments and "wait for the right time" to invest, notes George Putnam, editor of The Turnaround Letter, who says many are even "considering abandoning stocks forever." With the annual return of the S&P 500-stock index down 6% since the beginning of the decade, that doesn't surprise Putnam. But he says this is exactly the wrong time for investors to pull away.

"We believe the stock market will post a strong rebound in the not-too-distant future," argues Putnam. With the market's huge decline in 2007, many blue-chip stocks of the highest quality are trading at discounted levels not seen since the 1990s, he notes.

Indeed, Putnam and other bulls recommend that investors have the courage to pick up high-quality stocks now trading at 30% to 50% off their 2007 highs. But in these still financially fragile times, shareholders should focus on companies with a record of steady earnings growth, strong cash flow, and leadership in their respective markets. And in most cases, a company should have a clean and healthy balance sheet and ample free cash flow to fund healthy dividends.