Jubak's Journal
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5 stocks for the post-Greenspan world
Until Fed-chief nominee Bernanke proves himself, the markets are in for a wild ride. But these safe-haven stocks will help steady any portfolio.
By Jim Jubak
The financial markets are going to test the new guy.
Ben Bernanke may indeed be the greatest thing since sliced bread -- or at least the best choice to follow Alan Greenspan at the Federal Reserve -- but until he proves his chops, investors should expect more wild swings in the stock and bond markets than under Greenspan. (Not that the market was so well behaved during his time at the Federal Reserve, mind you.)
Look at the first two days of the countdown to Greenspan's departure. On Monday, Oct. 24, the day President Bush nominated Bernanke, the stock market staged a 170-point rally, but the bond market marched resolutely in the other direction. Investors apparently decided, for the day at least, that Bernanke would be a less resolute inflation fighter than Greenspan. So a Bernanke Fed might be less likely to raise interest rates -- good for stocks -- and less effective at controlling inflation -- bad for bonds.
The next day, the stock market decided it had had enough excitement and simply marked time. But the bond market continued to sell off, unconvinced of Bernanke's commitment to fighting inflation despite all the talk about setting a target inflation rate at the Federal Reserve. The 10-year Treasury note fell in price, raising the yield to 4.53%.
And gold, the asset that investors like best when inflation worries rise, got into the act on Tuesday. Gold futures rose $7.70 to $474.70 an ounce on the New York Mercantile Exchange.
Things that go bump in the markets
The market could well -- and most probably will -- change its mind again tomorrow or the next day. As qualified as Bernanke is, he has never been chairman of the Federal Reserve, he's never had to balance growth and inflation, and he's never been at the helm as the Fed navigated the financial markets through a crisis. Until the man has built enough of a track record so that the markets can judge him, the financial markets will jump and jump high if they even imagine that someone is about to say Boo!
More from MSN Money
More ups and downs mean tough times for high price-to-earnings ratio stocks, since their high multiples magnify every market dip into a market plummet. More ups and downs means sharp but brief one-day to two-week moves that then peter out or more confusingly reverse direction completely. And more ups and downs mean good times for safe-haven stocks that provide stability when volatility picks up.
On my regular weekly appearance on CNBC's "Morning Call," I picked three stocks that should do well in the increased volatility of a post-Greenspan market.
Glamis Gold (GLG, news, msgs). Investors buy gold when they're worried about inflation spiking out of control. They buy gold when the U.S. dollar starts to slip. They buy gold when market volatility kicks up. And they buy gold whenever they start to worry. All that will work in gold's favor during the shake-down tour of Ben Bernanke's Federal Reserve next year -- even if nothing in particular goes wrong. In this kind of pro-gold environment, I think the best gold stock to own is one that of a company that is increasing its production as gold prices rise. CIBC World Markets projects that gold production at Glamis Gold will climb by about 50% in 2006 from 2005 levels and that total cash cost of production will actually fall as production increases. Wall Street is projecting a 200% increase in earnings in 2006. Our StockScouter rates these shares a 4 out of a possible 10.
United Natural Foods. In my regular column on CNBC.com on MSN Money on Sept. 13, I wrote about five great food stocks to buy if the post-hurricane chaos sent the price of any of them tumbling. Well, the price of United Natural Foods (UNFI, news, msgs), the country's biggest distributor of natural and organic foods, has certainly tumbled on news that earnings would be off a few cents on rising fuel costs and on the departure of the current chief executive for personal reasons. Well, you know what? I like this stock even more at this price and even more with the uncertainty that a new chief brings to the Federal Reserve. Food stocks like this provide a solid buffer in uncertain times. About 25% of the company's sales go to one company, Whole Foods Market (WFMI, news, msgs), the 600-pound gorilla of the natural and organic supermarket business. That makes United Natural Foods a way to piggyback on Whole Foods growth -- and that of the entire natural and organic sector, of course -- at a cheaper price. United Natural Foods trades at about a 47% discount to Whole Foods; the stock's average historical discount to Whole Foods is about 25%. Our StockScouter rates the shares a 7 out of a possible 10.
Novartis (NVS, news, msgs). "Buy drug stocks when the going gets tough" is the traditional and time-tested advice. But lately that advice has been hard to follow -- and largely wrong -- because the U.S. drug sector is in the midst of a multi-year meltdown caused by patent expirations and product failures (and the resulting lawsuits). But investors looking for safety in the post-Greenspan markets can still find the traditional shelter in the European drug sector, especially at companies such as Novartis, where revenue growth is strong and drug pipelines are full. Novartis reported third-quarter 2005 earnings growth of 14% on Oct. 18 and beat Wall Street projections by a penny on better-than-expected profit margins. New products just launched, such as Enablex, Elidel, Gleevec, and Co-Diovan, pushed pharmaceutical sales up 9% in local currency and 11% in U.S. dollars in the first nine months of 2005. (Did I mention that owning a European drug stock is a good way to hedge any weakness in the U.S. dollar?) The integration of recently purchased generic drug makers Hexal and Eon is going more smoothly than expected, with generic revenue climbing 12% in local currency (14% in U.S. dollars) in the first nine months of 2005. Our StockScouter rates these shares an 8 out of a possible 10.
As always, I have two additional "exclusive" picks for readers of CNBC.com on MSN Money.
Goldcorp (GG, news, msgs). Goldcorp isn't quite as pure a gold play as Glamis Gold: With Goldcorp, investors have to put up with significant production in copper and silver as well. Gold production at Goldcorp won't show the huge 2006 ramp that Glamis is now projecting because Goldcorp's big growth spurt came in 2005, when an acquisition just about doubled the company's gold production. But in 2006, Goldcorp is projected to produce almost twice as many ounces of gold as Glamis Gold and at a total cash cost about $20 an ounce lower. As I wrote when I added this stock to Jubak's Picks on April 8, 2005, "Goldcorp is a particularly attractive gold stock in these circumstances because the company is increasing production and because the company is one of the industry's low-cost producers." Our StockScouter rates these shares an 8 out of a possible 10.
Luxottica Group (LUX, news, msgs). You may not know the company, but you certainly know its brands. Luxottica sells glasses and sunglasses under its own brands (such as Ray-Ban) or licensed brands (such as Versace, Chanel, and Prada) through a network of branded stores (LensCrafters and Sunglass Hut in the United States and Luxottica in the rest of the world). Sales grew by 38% (in euros) year over year in the first half of 2005 (43% at a constant exchange rate) and net income grew by 12%. And those results should give you a clue why I like this company as a safe haven as Bernanke takes the reins at the Federal Reserve. Luxottica is a great growth story that keeps its books in euros so any weakness in the U.S. dollar -- because of inflation or economic slowdown worries -- gives Luxottica's financial results an extra boost. Not that the company is exactly starved for growth: It just made its second acquisition in China since 2003, the purchase of Ming Long Optical, the largest optical retailer in Guangdong. Luxottica should also be able to improve its profit margins as it gradually moves production to China: The company projects that production in China will grow to 30% of total production capacity within two years. Our StockScouter rates these shares a 7 out of a possible 10.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Goldcorp. He doesn't own short positions in any stock mentioned in this column.
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