Stocks in a Global Growth Crisis
11/03/2014 12:01 am EST
The unimpressive rate of economic recovery is challenging but MoneyShow's Jim Jubak thinks there are stocks that have growth potential, even in the current difficult environment.
Okay, it might be extreme to say that we've got a kind of global growth crisis. We've certainly got a lot of slowing economies. We've got economies growing below their trend. We've got evidence that this is not simply a cyclical thing but that we're seeing a long-term slowdown in China, that Europe is not going to recover to hit even like 2% or 3% growth, that Brazil is going to be down below 1% for a while, so it's a challenging environment to try to grow earnings and revenue.
In this kind of environment, the companies that you want to look for, I think, are companies that continue to invest during the down part of the cycle because, at some point, the cycle does turn. Even if it's still a secular downtrend, you do get a turn in the cycle, you get improvement. The US economy, for example, is not exactly growing at a great rate but it has come off the bottom.
What you want to do is find companies that, while things are really tough, have enough cash flow and enough management smarts and discipline to invest in their business. You want to see companies that are still putting money into R&D because, when things get a little better and there's more market share to grab, these are the companies that grab it. The great example in the sort of diesel engine field is Cummins (CMI), which put money into R&D for its diesel engines when the diesel cycle was really down and, consequently, when the diesel cycle turned, which it did in the last year or year and a half, you've wound up with a lot of sales as well as the fact that their competitors who didn't put money into R&D are buying a lot of their components and even, in fact, full engines from Cummins.
Is there a comparable story? I would argue that it's Schlumberger in the oil services area, that one thing that's happening is that, as oil prices go down, the majors are having to look for ways to save money and you can do this by cutting capital spending but you also have a temptation to cut R&D. Now, there's always been a great tension between the Exxon's (XOM), the Chevron's (CVX) , and BP's (BP), the Shells of the world, and Schlumberger is basically an oil services technology company. What they do is they like to come up with technology that they then sell to the Exxon's of the world.
Exxon's would like to buy that but, on the other hand, they don't want to get to be so dependent on Schlumberger that they're buying the same technology that everybody has so there's been an effort on the part of the majors to continue to spend R&D to push the envelope on things like seismic imaging, oil field management, so they've got their own technology edge that they hold over competitors. Right now, it looks like one of the places that oil majors are cutting their budgets is in R&D and, if Schlumberger, as it looks like, since Schlumberger knows what its business is, continue to spend on R&D, when the oil sector comes out of this cycle, Schlumberger is going to be in an even stronger position than these customers/competitors than they were when the cycle was high and so that's the kind of growth story I think you'd like to look for.
Schlumberger recently just got its target price cut by Goldman Sachs from like $123 down to $119, Goldman still puts a buy on the stock since the stock is trading in the low $90s, there's still good upsiding for this part of the cycle, so that's the kind of company you want to look for when growth is really tight and I would suggest Schlumberger (SLB) is a really good candidate right now.