The three best (and worst) stocks of Obama’s first 100 days
Today's Financial News - Posted January 21, 2009
Americans are begging for change. Will President Obama give them what they want or will the first 100 days of his career in the Oval Office be just as bad as the last 100 days?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is do-or-die time in corporate America. If companies do not get their finances in line and make a turnaround during the first quarter of 2009, their days as a going concern are over.
Indeed, the bankruptcy courts will be busy as we countdown President Obama’s first 100 days in office, but that does not mean we will not see long lines of investors cashing in their market-creaming gains. This is a time of great flux in the American markets, which requires savvy, well-researched investing techniques.
Make the right choices and the next 100 days will be like no other. Make the wrong choices, and you will be begging for the good ‘ole days of the Bush administration.
When the final closing bell of 2008 rang, the Dow closed the year with a price/earnings ratio of 13.27. While that figure is about 10% below the historic average of 15, you will quickly realize it is quite high if you have been tracking the amount of 2009 earnings forecasts that have been dramatically slashed.
Scores of companies across all industries, including bellwethers like Johnson & Johnson (NYSE:JNJ), have cut their 2009 earnings forecasts. That means P/E ratios, the most basic of financial measurement tools, are screaming that shares of many companies remain intensely overvalued.
While the bears are raising hell on Wall Street, there are a few straggling bulls roaming free – more than enough to give investors a very real shot of actually smiling the next time they open their 401(k) statement.
Over the next few minutes, I want to share three dangerous companies you should keep your distance (and your savings) from and three that you should be socking every spare dollar you can find into. All of them will make significant moves during the first 100 days of Obama’s presidency.
Let’s start with the companies that will be around to see all of Obama’s presidency. There may be less than you think.
The winners…
No matter what happens to the economy or who is leading the government, Americans are always going to get sick and they are always going to get old. Granted, how much we pay for our healthcare and who pays for it will always be a hot debate, but we all know Obama is not going to revolutionize the nation’s healthcares system in just 100 days.
That means The Ensign Group (NYSE:ENSG) is worthy of your investing dollars. The company specializes in nursing and rehabilitative services in the western section of the nation, an area that attracts the company’s target demographic like moths to a streetlight.
While so many other companies are contracting, Ensign is expanding at an exciting clip. Not only is this $330 million company using some of its $56 million in cash to buy its competition (it finalized two deals earlier this month), it is increasing the amount of its earnings it sends directly to its consumers by 12%.
That’s right, while countless companies were cutting their dividends, Ensign raised its investor reward. With an annual payout of just $0.18, which represents just 1% of the current share price, the dividend is not much, but the folks that have studied signaling theory known this is an extremely bullish signal from the company’s management team.
In fact, the company’s CEO, Christopher Christensen, recently said of the increased dividend, “ It reflects our continued confidence in our operating model, and in our ability to return value to our shareholders in a difficult economy.”
He is not lying.
Some other important things to know about this company:
- It has a current ratio of over 2, meaning it will have no problem paying its bills even in this shaky credit market.
- It is expected to post earnings growth of over 15% over the next five years.
- Its share price performance has beaten the pants of the major equities over the past six months (look at the chart.)
The Ensign Group is a well-managed company with a high-demand product that does not suffer at the mercy of consumer demands. Its books are squeaky clean and its management team is signaling that things are only going to get better.
That is all the reason you need to put shares of this company in your portfolio.
Spinoffs are good
Wall Street does not like General Electric (NYSE:GE) right now, but it since the market reached its lows in November, one of its former subsidiaries has surged by more than 35% and shows no indication of slowing down.
In 2005, Genpact (NYSE:G) was spun off of GE Capital, with equity investments from General Atlantic and Oak Hill Capital Partners. The public did not get a shot at the new company’s revenue stream until 2007.
Since going public less than 18 months ago, Genpact’s earnings made significant gains. During its first quarter as a public company, the company lost $8 million. Last quarter, it showed investors its true potential with earnings of nearly $34 million on just $270 million in sales. That’s a 12% profit margin.
Genpact makes these profits by maximizing profits for other major companies spread throughout the world. It specializes in providing process and analytical insight that allows companies to squeeze every penny of potential profit from their operations.
Have you read the stories lately of companies refining their process, working to increase their margins and eliminate operations waste? If not, I can tell you I could wallpaper my office in the articles printed just this week.
When the economy is on the rocks, consumers are not spending and revenues are plummeting, companies must do everything they can just to stay in business. That is why they turn to Genpact.
If the company started under the eye of Jack Welch, you know it contains his core values to this day. What could possibly be a better investment in a time of economic contraction than a company that specializes in helping companies get back on track?
Genpact is a $1.8 billion company with $315 million in cash, just $113 million in long-term debt and has seen its earnings rise by an average of 30% per quarter since becoming a public company.
If Genpact can get the rest of the nation’s businesses to look so appealing, the economy will look better in no time.
Buy what you know
So far we have looked at companies that are considered growth investments. Any well-managed portfolio has a proper allocation of growth and value prospects. That means we need a company that is selling for pennies when it should be selling for dollars.
Prestige Brands (NYSE:PBH) may not be selling for less than a buck a share, but it is definitely trading for a fraction of its true value. A single-digit P/E multiple of 9 proves it.
This company is all about the value of its brand. You may know the company through its Comet, Spic and Span, Cutex or its Chloraseptic brands. Chances are, if you open any bathroom or below-sink cabinet in your house, the company’s products will be right there in your face.
Investing in this company is the definition of investing in what you use, the strategy Warren Buffet used to get rich.
But it takes more than a few powerful brands to make a winning investment. It takes a strong set of books and an undervalued share price. Of course, Prestige has both.
Let’s go back to that single digit P/E. In this economy, financial figures from the past mean very little as earnings can change with the wind. But Prestige is expected to announce quarterly earnings that are down by just a few pennies per share even in the heat of a nasty recession. That means, unless share prices rise (my bet) we will continue to see a rock-bottom ratio.
When it comes to managing its debt, the mature company does quite well. Over the next twelve months, Prestige has just under $38 million in bills. With nearly $89 million in short-term assets and anticipated continued positive cash flow, the company has more than enough in reserves to see it through these economic doldrums.
Shakespeare asked, “What’s in a name.” Prestige proves there is a lot more than a shot at love riding on its brand names.
Check out Prestige Brands and the two other stocks I mention and see if they fit your portfolio.
As for the three stocks you absolutely must avoid over the next 100 days, well, you will just have to check back in here tomorrow afternoon.
Next Article: The year of Comcast (CMCSA)
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