Two Picks for a Summer Pull Back

06/08/2009 1:00 pm EST

Focus: STOCKS

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, says investors will reappraise the market’s recent run and will gravitate toward steadier stocks in coming months.

Typically, after a major market bottom, the stocks that took the hardest hits during the last phase of the downturn zoom to the top of the performance charts during the first few months of recovery. The current cycle has proved true to form.

As we move into the summer months, however, I expect a “changing of the guard,” [because] while conditions have improved somewhat, we’ve still got a long, potholed road ahead of us.

Remember, the Federal Reserve’s “stress tests” assume that the nation’s 19 largest banks alone could lose another $599 billion by the end of 2010. According to the International Monetary Fund, US banks have written off only about half the losses they’ll eventually have to swallow on sour loans and other bum assets.

These horrific numbers suggest that, regardless of any Washington arm-twisting, bankers will uphold fairly strict lending standards for some time to come. Consumers, for their part, will tend to scrimp on frills until the job picture brightens considerably and debt burdens ease. Skinflint bankers and frugal shoppers hardly make a recipe for an economic boom.

Once these realities sink in, traders will take profits on the stocks that have screamed skyward in recent weeks, [and] my guess is that they’ll rotate into safer, steadier companies whose share prices haven’t climbed as far yet.

ExxonMobil (NYSE: XOM), which has continued to drill aggressively during the industry downturn, will be set to cash in almost immediately [on] even a modest recovery in global business activity [that] will eat into inventories of oil and natural gas, putting upward pressure on prices.

The financial titan of oil, sitting on $31 billion of cash (enough to pay off all the company’s debt three times over), XOM is seldom a cheap stock. Since early March, though, investors have raced into dicier energy plays and left Exxon behind. It’s time for quality to catch up. Buy XOM at $74 or less. (It closed just below $73 Friday—Editor.)

You know the old saying about what happens when the going gets tough. PepsiCo (NYSE: PEP), which produces Lay’s snack foods and Quaker Oats cereals as well as soft drinks, fruit juices and bottled water, is run by one tough customer, Indra Nooyi, who “got going” in early May with a 6% dividend hike.

The company has now sweetened its payout 37 years in a row. I love consistency of that sort, especially when so many other outfits (banks, for instance) have disappointed shareholders lately by slashing dividends.

Still, I’m even more impressed with PEP’s generous dividend yield—currently around 3.3%.

When safety and rapid growth combine with a lofty absolute dividend yield, you’ve got a bargain! Pay up to $57 for PEP. (It closed below $55 Friday—Editor.)

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