4/30/2014 4:15 PM ET|
7 stocks to buy as Fed easing slows
High-quality companies such as Disney, Qualcomm and Chevron may be rewarded as the Federal Reserve lets up on the monetary gas pedal.
Which stocks may be the best bets as the Federal Reserve tapers its bond-buying program?
Surprisingly few people are asking that question. A more common question is, how will the pending end of the central bank's $3 trillion-plus quantitative-easing program affect stock and debt markets as a whole?
That's an important question, too. But, as investors, we want to know what it means for individual stocks as the Fed reduces -- and, presumably, eventually eliminates -- QE, and thereby forces the economy to stand on its own two feet.
One good place to start is to look at companies that not only survived, but continued to prosper, during the Great Recession of 2008-2009. According to FactSet, the earnings per share of only 107 S&P 500 ($INX) companies grew from 2007 to 2008 and also from 2008 to 2009 -- or about one in five.
One such company is Wal-Mart (WMT). Investors recognized and appreciated its ability to turn a profit even in the worst economic downturn since the Great Depression, and its stock rose 7.7 percent between the market's October 2007 high and its March 2009 low -- compared with a loss of more than 50 percent for the S&P 500. (Both returns include dividends.)
Investors' memories are notoriously short, however, and Wal-Mart's virtues are no longer appreciated as they were then. Now the companies whose stocks are rising the fastest are those whose very survival was most in question during the 2008-2009 bear market.
Such is the impact of the Fed's policies, which in effect subsidize risk taking. Since the bear market ended on March 9, 2009, for example, Wal-Mart's stock has produced a total return of 80 percent versus 207 percent for the dividend-adjusted S&P 500.
To be sure, even without Fed stimulus, it is entirely normal in the first months of a new bull market for the highest-risk stocks to outperform the most conservative ones. During the 2008-2009 bear market, the stocks of those highest-risk firms were depressed due to the possibility they wouldn't even survive the economic downturn -- and it makes sense they would bounce back a huge amount as the economy retreated from the precipice.
It's not usual for an aging bull market to continue favoring the lowest-quality companies. And they nonetheless have, in no small part because of the Fed.
Consider returns over the last quarter and year of various subsets of stocks within the S&P 500, courtesy of Sam Stovall, chief equity strategist at S&P Capital IQ.
S&P Quality Rank
Return last 13 weeks
Return last 12 months
A- to A+
B to C
On the theory that investors may soon find reason to once again appreciate the virtue of consistent earnings, Stovall compiled a list of all S&P 500 companies that are ranking A for financial quality and are also rated "buy" or better by S&P analysts. Just 20 survived those otherwise modest criteria.
To come up with the list below, I narrowed down Stovall's picks even further to include those that are currently most recommended by the Hulbert Financial Digest-monitored advisers who have beaten the stock market over the past 15 years -- a long enough period to largely eliminate the role played by luck in beating the market.
— Chevron (CVX)
— Comcast (CMCSA)
— Disney (DIS)
— McKesson (MCK)
— Norfolk Southern (NSC)
— Qualcomm (QCOM)
— Travelers Companies (TRV)
Mark Hulbert is the founder of Hulbert Financial Digest in Chapel Hill, N.C. He has been tracking the advice of more than 160 financial newsletters since 1980.
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