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November 17, 2008 Issue Posted November 6, 2008, 5:00PM EST

Inside Wall Street

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In Troubled Times

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WMS Industries

Gene Marcial on Investing

Stalwarts to Stick with in Troubled Times





Despite the market's 486-point drop on Nov. 5, most strategists are betting on a spirited advance that could last six months or so. They call it a "relief rally" following the end of a long and acrimonious Presidential campaign. But soon after any brief period of euphoria, attention will return to the market's biggest fear: How long and how deeply will recession roil the economy? Many investment pros fear the worst, so they don't expect the market to post record highs in 2009. After the election lift, "it's back to the fundamentals, which aren't looking good," says John Maloney, president of M&R Capital Management. True, market psychology could brighten because of the election of Barack Obama. But that may be overshadowed, some strategists say, if the economic outlook remains as dark as it is right now. And whatever economic policies President-elect Obama launches won't kick in soon enough to provide immediate help.

In October, the Institute for Supply Management index showed that "manufacturing declined at its fastest pace in 26 years," says Maloney. That measure of factory activity tumbled to 38.9 in October from 43.5 in September. Since 50 is the dividing line between expansion and contraction, it suggests that the recession may be even worse than many anticipate. Instead of a 1% drop in gross domestic product, the economy may experience a 2%-to-3% drop during this period, warns Maloney. In any case, a defensive strategy is vital: He favors big pharmaceutical companies, such as Johnson & Johnson (JNJ); cable services like Comcast (CMCSA), the largest in the U.S.; and drugstore chains, such as CVS Caremark (CVS).

During the previous 18 Presidential election years, the Standard & Poor's 500-stock index posted positive total returns in the fourth quarter, with one exception: the year 2000. "But it would take a very powerful rally to bring the S&P 500 back into positive territory this fourth quarter," warns Jeffrey Kleintop, chief market strategist at LPL Financial, given October's precipitous stock drop.

Scott Armiger, vice-president and portfolio manager at Christiana Bank & Trust, which has assets under management of $1.7 billion, says that in light of what is happening currently, "we are overweight [in our portfolios] in companies that provide consumer staples, and underweight in financial stocks." He thinks the best strategy is to stay with such stalwarts as J&J, Wal-Mart Stores (WMT), and Walt Disney (DIS). These companies provide a safe haven for investors—offering goods and services that consumers need to keep buying even during recessions, according to Armiger.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

Raking It In at WMS Industries

Casinos and gambling are on the ropes, punched out by the economic slowdown. Even so, WMS Industries (WMS), a designer and maker of video and slot machines and video lottery terminals, is reeling in fat sales and profits. Its thriving foreign operations have offset the weak U.S. market. But its shares have slumped. After hitting 41 in February, they're now at 24.81.

The big price drop—as earnings rise—adds to the stock's long-term appeal, says Alan House, an analyst at Value Line (VALU). The largest WMS stakeholder is Viacom Chairman Sumner Redstone, with almost 8%.

Robert LaFleur of Susquehanna International Group, which is seeking to do business with WMS, says the company is one of the few compelling stories in this weak economy. He foresees profits of $1.50 a share in 2008 and $1.68 in 2009, compared with $1.14 in 2007.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

—Gene Marcial

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