There was some ray of hope that the second half of the year would be OK when the government revised GDP up 2.2% for the second quarter. A number of economists looked at the figures and said they meant nothing. What is past is past.
When the inflation numbers and personal income figures came out today, they virtually assured that the period from Labor Day to New Year’s is going to be a hard road. Nothing in the latest data from housing to earnings shows a scintilla of a sign that the economy is improving.
If the market is likely to drop and earnings are likely to continue in a flat spin, investors probably do not have many places to go, especially for investing in individual stocks.
There are a few that should out-perform the markets by a reasonable margin.
GE (GE) The bear case on GE is that its stock is low, and that earnings have been slightly disappointing. There bull case is much stronger. GE has made a persuasive case that it is in the process of selling off dogs like its appliance business and building its huge infrastructure operation. Management says that growth in Asia will be nearly spectacular. The company’s medical supply business may have had only modest earnings recently, but health-care will continue to be a growth industry. Wall St. does not like GE’s ownership of NBCU, but the Olympics demonstrated that the division has a future in digital broadband programming. Of all the advertising media, internet-based content is likely to do the best over the next decade. GE is at $28.50. A decent third quarter and Q4 forecast should push it to $35.
Boeing (BA) has to settle with its machinist union. If there is a strike, earnings will turn sour. It is reasonable to assume that the airplane maker cannot afford that. Labor peace would mean the launch and beginning of deliveries of the new Dreamliner, which is the key to Boeing’s earnings over the next four or five years. Boeing says that demand growth in the Chinese commercial carrier business should remain unusually strong. Any orders out of the world’s most populated country are likely to give the shares a boost. Boeing is another large cap company with very modest expectations. It has dropped to $65 from a 52-week high of over $107. Ending the chance of a strike and shipping the Dreamliner should get Boeing back to $80.
Verizon (VZ) has shareholder troubles because it is losing its traditional landline business and growth of its fiber-to-the-home television operation is not expanding as fast as expected. The stock has fallen from it 52-week high of $46.24 to $35.28, near its period low. Verizon has two important things going for it. There are only three cellular carriers of any size in the US. One of them, Sprint (S), is badly wounded. Growth in voice and data services to new smartphones will accelerate which will push up revenue and margins at AT&T and Verizon Wireless. The fiber concerns should begin to disappear. The FiOS product is only available in a small fraction of the 18 million homes Verizon serves. As its installed base moves up, Verizon’s ability to challenge cable will growth. Fiber usually delivers a faster signal than traditional cable connections. That advantage is worth a lot to customers who want better connection speeds and HDTV. Look for Verizon to get to $40 before the end of the year.
Lehman (LEH) A lot of investors think this is one of the most poison stocks on Wall St. That may turn out to be almost completely untrue. Lehman is a takeover target. It has an extremely valuable asset management company in Neuberger Berman. A large US or foreign bank with the balance sheet to absorb some of Lehman’s losses would pick up the firm’s real estate holdings, asset operation, M&A, and underwriting operations. Lehman trades for under $16. In June it was at $28. Watch for a bigger financial operation to pick it up, probably for better than $20.
Ford (F) The car company may well be too big to fail, at least in the eyes of Congress. Several Representatives are pushing for the "Big Three" to get $50 billion in loan guarantees to update their plants so they can make more fuel-efficient cars. The idea of Ford and GM (GM) falling into Chapter 11 or being sold to foreign car companies may be too hard a picture for the federal government to imagine. In addition, the auto industry still employees over 200,000 people, which does not include employment at their suppliers. Ford trades at a 52-week low, just below $4.40. Its period high is $9.24. Government assistance is worth a $2 improvement in the share price.
Douglas A. McIntyre
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