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When it's snowing,
you don't walk outside in shorts. But on the hottest day in
summer, shorts would be perfect. Likewise, some categories of
stocks are best left alone for right now. The global recession
is too deep and too pervasive for economically sensitive areas
to sustain rallies. But six to nine months from now, these areas
could be ripe for the picking because they will be undervalued
relative to their post-recession prospects -- and finally ready
to rally.
History confirms that properly timing the purchase of
down-and-out sectors can result in outsized gains. For example,
technology stocks in the U.S. crashed in 2000 after a historic
run that ended with a bubble-like surge. The tech-heavy Nasdaq
Composite Index peaked on March 10, 2000, then fell into a
relatively uninterrupted bear market until October 10, 2002. But
after that, it rose +158% over the next five years. Buying tech
stocks in early October 2000 or 2001 would have been a mistake;
buying them in early October 2002 would have been brilliant.
Read on for my three areas to avoid today, when it will be time
to buy them and a high-yield pick from each to consider down the
road.
Industry: Banks -- I remain skeptical on the
banking industry in the short run. Despite massive government
assistance in the U.S., Europe and Japan -- as well as other
countries -- banks continue to report earnings and balance
sheets that are worse than even the bleakest expectations.
The mess that began with subprime lending is not resolved.
Government intervention seems to have laid the groundwork for an
eventual resolution -- safety nets are in place, and governments
around the world are now on the hook for absorbing bad loans if
necessary to keep the financial system afloat.
Still, banks remain plagued by the frozen lending markets.
Without rising loan activity, their bad or underperforming loans
remain too significant a percentage of their assets. Put another
way, banks have regained the ability to make loans, but there
isn't enough loan demand for them to exercise that ability to
grow their earnings or cash flows. And many are gun-shy about
lending to anyone who doesn't have a sterling credit rating.
The recession isn't helping, as even within relatively healthy
industries -- such as consumer staples and healthcare --
companies are hunkering down rather than borrowing money to
expand their operations.
When to Buy: Housing prices need to bottom before large
banks can truly recover. As home prices move up, demand for
mortgage loans originations will take off -- stabilizing banks'
loan portfolios, helping them remove non-performing mortgage
loans from their books, and creating healthy, reliable cash
flows for the future. Just as important, the mortgage-security
market will recover, creating needed capital for banks to do
business.
Another good sign will simply be the lack of any unexpected bad
news from the banking sector during quarterly earnings. When an
industry is known to be in bad shape and expectations already
have been dialed down repeatedly, it's truly devastating when
the leading companies within that sector nonetheless miss
expectations. That needs to stop -- in the first or second
quarters of 2009, perhaps -- before banks can stage a strong
rally.
Likely Standout: HSBC Holdings (NYSE: HBC, US$28.25)
has slumped on concerns it will need additional capital. But
it's the best-positioned large bank in the world, with strong
exposure to emerging markets, a vast depositor base, relatively
transparent assets, and a 9.1% yield.
HSBC management recently reiterated that they do not anticipate
needing any government funds to make it through the recession --
giving the bank a huge leg up over its competitors in the U.K.
and the U.S., which now have become partly nationalized.
Industry:
Automakers -- Aside from banks, no industry seems as
troubled today as automobile manufacturers.
Most Americans know that the "Big Three" U.S. automakers are
teetering on the edge of survival, and GM and Chrysler had to be
bailed out by Congress in December. The latest bad news
came last week, as January sales fell precipitously
year-over-year for all three: Ford's sales dropped -40%, GM's
were down -49% and Chrysler's plunged -55%. And although foreign
automakers performed slightly better, the worldwide picture is
grim: Global auto sales still fell -37% in January.
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I see no reason to try to bottom-fish the auto industry at this
point. With unemployment on the rise and banks still reluctant
to make loans to anyone without an impeccable credit score, car
sales likely will remain dismal for several months.
When to Buy: The only good sign in the auto-sales numbers
was that the total number of cars sold in January wasn't down
much from December. That indicates that a bottom in demand could
be forming. When sequential car sales start moving up -- without
the artificial spur of increased rebates or zero-interest
financing -- the automakers will breathe a sigh of relief, and
investors should start considering them.
I'd go one step further, though: In addition to signs of a
bottoming out of demand, we should wait until there are signs
that unemployment has topped out. No one buys a new car if
they're out of a job or worried that their job is in jeopardy.
But if employers start hiring again -- even if that hiring is
limited to certain sectors or regions -- auto sales can begin to
recover.
Likely Standout: Daimler AG (NYSE: DAI, US$21.58),
the German maker of Mercedes Benz, Maybach luxury cars and Smart
Cars is clearly being hurt by the recession, as even the most
affluent consumers cut back on big-ticket items. In January,
Mercedes sales fell -43% year-over-year in the U.S., for
example. I don't expect the stock to stage much of
a rebound until auto sales bottom and unemployment starts coming
down.
However, Daimler boasts perhaps the most-respected auto brand in
fast-growing emerging markets. In recent years, sales of
Mercedes cars have boomed in China, India, Russia and Brazil.
The company is well-managed and has moderate debt of about 45%
of capitalization. At a 8.6% yield, its dividend likely will
remain flat in 2009, though it could be cut if the recession
worsens or is prolonged well into the second half of the year.
Again, I'd hold off buying Daimler for now, but it could be
available for a bargain once the global economy starts to
recover.
Note that Daimler still owns about 20% of Chrysler, but it has
no responsibility for the company's healthcare or pension
liabilities.
Good Investing!
-- Nick Lanyi
Editor
High-Yield International
Published monthly,
High-Yield International is the nation's #1 publication
devoted exclusively to international income investing. Each
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presents a listing of the most profitable, highest-yielding
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About Nick Lanyi
Nick Lanyi -- Editor of
High-Yield International -- has spent 17 years
researching and analyzing money-making opportunities for some of
the most widely read investment advisory services in history.
During his priceless apprenticeship with Louis Rukeyser, Nick
steadily rose through the ranks to ultimately supervise all
investment research for Rukeyser's newsletter. He personally
analyzed hundreds of companies and spent years specifically
focused on high-yielding stocks and bonds .
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