A Growth Stock for Nervous Pessimists

10/03/2007 12:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

James Jubak, senior markets editor for MSN Money, says growth stocks are good hedges against economic weakness, and he identifies one he thinks will thrive in any environment.

I'm adding growth stocks to my portfolio.

Not because I'm so optimistic about the economy and the financial markets. Exactly the opposite, in fact.  I'm buying growth stocks—and adding more exposure to gold stocks—because I'm deeply pessimistic about the economy and the financial markets over the next 12 to 18 months.

But unlike those [who are] now calling for a recession, I believe we're likely to get out of this mess—in the short run, at least—by flooding the financial markets with hundreds of billions [of dollars] in new money from the world's central banks. The central banks will literally paper over the long-term problems in the debt market with billions in currency.

This flood of cash will, in the next few months, restore liquidity to those parts of the debt market that have threatened to seize up in recent weeks. It will restore confidence among bankers, who will stop hoarding liquidity. It will produce a rally in the stock market. And it will head off any possibility of the economic slowdown in the United States and Europe turning into a recession.

I want to increase exposure to growth stocks, because I think the bailout of troubled banks by the Federal Reserve and the European Central Bank will kick off a liquidity rally some time after mid-October.

But I also want to limit my downside risks—in case I'm wrong about the rally or the economy slows more than I expect—by buying growth stocks in parts of the economy that are relatively sheltered from any economy-wide storms.
 
DaVita (NYSE: DVA) is my first buy from my list of five growth stocks for pessimists.
 
Diabetes is, unfortunately, a growth industry in the United States. The incidence of the disease is climbing by about 4% annually in our aging and overweight population. DaVita is the leading US provider of dialysis and related services, serving 104,000 patients through a network of 1,300 outpatient clinics.

The stock has spent the past year building a base around $55, as worries about cuts to Medicare rates would hurt DaVita's revenue. But with increases in Medicare reimbursement rates that went into effect April 1st, I think these worries are in the past.

In its August 2nd second quarter, the company beat the Wall Street earnings consensus by six cents a share, as use of its anemia drug erythropoietin, or EPO, decreased less than feared after the US Food and Drug Administration changed labeling. Management also raised revenue guidance for 2007 to $790 million to $820 million from $740 million to $780 million.

With operating margins expanding recently, the higher revenue guidance says to me that DaVita could surprise Wall Street again in coming quarters. As of [mid-September], I'm setting a target price of $70 a share for July 2008. (The stock closed Tuesday below $64—Editor.)

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