5 Bottom-Up Bargains
It's been quite a bull market run over the past four years, even though it hasn't felt much like a bull run. By looking at specific companies, you can still find value in some of the top sectors moving forward.
However, once you get past these obvious safety sectors, you’re well advised to exercise considerably more discretion among companies. For example, Income picks Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) are increasingly grabbing market share in the US, even as smaller rivals such as Sprint (NYSE:S) post larger losses. Real estate has been a disaster for many US REITs and banks, but others have scored big by adding valuable assets at the expense of their weaker rivals.
Pharmaceutical and consumer staples companies are generally thought of as enjoying recession-proof businesses. But here again, revenue reliability has boiled down to how individual outfits have secured demand by making products indispensable—and not every company has succeeded.
The starkest intra-sector contrasts are no doubt in the natural resources business. Master limited partnership Linn Energy (NASDAQ:LINE), for example, has locked in prices for all of its expected oil output through 2016, and through 2017 for gas. Even in the extremely unlikely event that oil fell to $20/bbl, Linn would still make its baseline revenue
Meanwhile, BHP Billiton (NYSE:BHP) produces a range of resources from multiple sources serving a multitude of markets. These are among the highest percentage bets in their industries, come what may.
Just as important as revenue reliability is debt, and particularly what’s coming due in the near future. If lawmakers in Washington, DC fail to reach an accord on spending and taxes and the economy plunges off the fiscal cliff next year, the resulting economic contraction and credit crunch will almost surely have done their worst by the end of 2013. Therefore, companies that aren’t absolutely compelled to access credit markets between now and the end of 2013 should be immune.
On this score, entire sectors are potentially vulnerable. The mortgage REIT sector, for example, is particularly dependent on credit markets, as the wave of bankruptcies in 2007-2008 can attest. Nonetheless, companies across a wide range of industries have immunized themselves from near-term credit refinancing worries, including many that operate in capital intensive and highly leveraged sectors.
In corporate America, the new “cool” is to be fiscally conservative. That suits me just fine, as I search for bargains in a market where investor fear is still creating value.Editor's Note: This article was written by Roger Conrad of Personal Finance.
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