Two to Buy As the Market Slows

10/08/2009 1:00 pm EST


Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, finds two stable, quality stocks he thinks will do well as the market cools off from its torrid advance.

Barely six months ago, the financial world was in a panic, and stocks were crashing around the globe. Today, champagne flutes are clinking as investors toast one of the most spectacular market rebounds on record.

From the March 9th closing low, the Standard & Poor’s 500 index soared 58% in just 133 trading sessions—the steepest ascent in such a compressed time [period] since 1933. Some of the emerging markets have done even better.

However, this is no time to be smug. History suggests it won’t be long before the market’s trajectory starts to flatten out. Since 1942, the S&P 500 has jumped an average of 38% in the first year of a new bull market. We’ve already overshot that benchmark and, with almost six months to go, have pulled even with the biggest first-year gain of the post-World War II era (58% in 1982–83).

As the market starts to level off, however (and the economy settles into what I expect to be a pattern of slow, labored growth), some companies won’t live up to their turnaround billings. Investors, stung, will flock back to quality businesses. On the buy side, my watchword is: Only the best.

Few enterprises can claim higher quality credentials than McDonald’s(NYSE: MCD). The world’s largest fast-food restaurant chain has doubled its profits in the past five years. Record earnings are in the bag for 2009, despite the recession, with another 8%–10% gain likely in 2010.

No debt worries here, either: Mickey D’s churns out enough pretax cash flow to cover its interest payments 12 times over. I wish the average American homeowner could say the same!

Did I mention dividends? MCD currently yields a handsome 3.9%. That’s almost double the skimpy payout of the S&P 500. Buy MCD at $59 or less. (It closed above $57 Wednesday—Editor.) I project a total return of 20%–30% in the year ahead.

Like McDonald’s, many safe-and-sound utility stocks have gotten the brush-off in recent months. Don’t worry. They’re packed with value now, and they’ll come roaring back at the first sign of jitters in the broader market.

Conservatively financed gas distributor South Jersey Industries (NYSE: SJI) serves southern New Jersey, one of the faster-growing population centers in the Northeast. The current yield (3.3%) may seem modest, but SJI has boosted its dividend an impressive 65% over the past decade.

Dividend growthtends to drive a utility’s share price higher. Thus, if you’re looking for total return (income plus price gain), a dependable grower like SJI will—over time—put you far ahead of its slow-footed peers. Buy SJI at $36 or less. (It closed just below that Wednesday—Editor.)

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