Stocks that defy the economic downturn
By Gene Walden
From the Minneapolis Star Tribune, Jan. 2009. It’s the cold season. Howling winds, sub-zero temperatures, long nights, short days, and flu bugs of countless strains.
Even in a down economy, there are certain things most consumers simply won’t live without—heat, electricity and medical care.
As a stock market investor assessing the universe of stocks now trading at a 30 to 50 percent discount from their highs, you might consider looking for companies that are going to continue to generate solid revenues regardless of poor economic conditions.
That means utility companies and medical providers. Here are some stocks to consider:
Medtronic (MDT). If you need a pacemaker, are you going to wait until the economy turns around? Probably not. Medtronic manufactures life-saving devices such as stents, defibrillators, pacemakers, drug delivery systems and a variety of other medical devices. No question Medtronic has been a disappointing stock for the past decade after a couple of decades of exceptional growth. The stock had basically been locked into the $45 to $50 range for this entire decade—until the recent market collapse when it plunged about $20 to its recent price of about $32. It hasn’t been that cheap since 1998. However, there is some justification for the price decline. The company suffered a 14 percent decline in earnings last quarter due to litigation expenses and a decline in market share. But management has projected solid growth for the next five years. The stock has a price earnings ratio (PE) of about 16 and pays a 2.3 percent dividend yield.
St. Jude Medical (STJ). The St. Paul based medical manufacturer makes cardiovascular medical devices and implantable neurostimulation devices. Like Medtronic, St. Jude stock has been hammered severely in recent months. Currently trading at about $29, it is down 40 percent from its 52-week high of $48.49. Its current PE is about 15. The company pays no dividend.
Techne (TECH). Business continues to fare well for Techne, which manufactures cardiovascular medical devices and implantable neurostimulation devices. The stock has dropped to about $62 a share after reaching a 52-week high of about $82. It still has a fairly rich PE of 22, driven primarily by expectations for continued solid earnings and revenue. The stock has a dividend yield of about 0.4 percent.
American Medical Systems (AMMD). The Minnetonka-based operation provides urological medical devices for both men and women. The stock dropped from a high of $18.42 to a low of $7.99, but has recovered somewhat to a recent price of about $11. Its upturn was fueled primarily by stronger than expected fourth quarter sales. Although its official sales and earnings report is not due for release until next month, the company offered preliminary figures earlier this month that exceeded its previous guidance. The stock pays no dividend and has a very rich PE of about 36.
The medical business is not the only sector that consumers rely on in good times and bad. Utility companies also maintain a fairly steady business regardless of economic conditions. There are several utilities worth considering:
Allete (ALE). The Duluth-based electricity provider has seen its stock drop nearly 40 percent from a high of $49 to its recent level of about $30. Part of that drop is due to declining electricity usage by the slumping taconite industry on the Iron Range. But Allete hopes to redirect its power to other electricity providers. In the meantime, however, its earnings have declined by about 15 to 20 percent below earlier expectations. The stock has a low PE of about 11 and pays an excellent dividend yield of 5.6 percent.
Xcel Energy (XEL). Xcel has been holding fairly steady in the $18 range for the past few months. In this market, Xcel would hardly qualify as a bargain stock—it’s only trading about $4 below it’s 52-week high. But with a dividend yield of 5.3 percent, even if the stock doesn’t move up anytime soon, the return is still pretty attractive. The stock has a PE of about 13.
Otter Tail Corp. (OTTR). The Fergus Falls electric utility stock continues to sink as its move toward increased wind generation is running out of steam. The company staked much of its future on increased wind generation, but falling oil prices have made wind generation less attractive for now. In the long run, its emphasis on wind generation should be a boost to the bottom line, but that probably won’t happen until oil prices begin to move back up to their previous levels. The stock is currently trading at about $20, which is 56 percent below its 52-week high. Even after the drop, the stock still has a PE of about 17, which is fairly high among utilities, but it does pay an attractive dividend yield of 5.3 percent.