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SIVY ON STOCKS from money.com
May 4, 2001 Staggering toward profits The economic numbers are hard to sort out, and some analysts are talking about stagflation. The best stocks for this environment include consumer products companies like Procter & Gamble. By Michael Sivy The most recent economic data all contradict each other. First we hear that real gross domestic product grew at a 2 percent annual rate in the first quarter -- a stunner, because just about everyone was expecting growth to be down from the 1 percent rate of the fourth quarter. So no need to worry about recession, right? But then we get employment data that shows payroll numbers tumbling and unemployment up from 4.3 percent to 4.5 percent. In addition, inflation pressures -- particularly labor costs -- are moving ominously higher. Economists are starting to talk about stagflation, the awful combination of inflation and low growth. The last time they did that we had an oil crisis and a horrific bear market. Don't take any of this too seriously. Confusion and economic cross-currents are normal at this point in the business cycle. What we're seeing now is the regular churning that occurs as the economy completes a slowdown and struggles to get back on a growth track. For investors, the key is to isolate the trends that really matter. The most important one is that the economy as a whole is still growing. Despite lots of scattered bad news, we still haven't has a single quarter of declining GDP. We might get one, but it's hard to imagine that we'll get two really bad quarters back to back -- and that's what defines a recession. At worst, it looks as though we'll get what they used to call a "growth recession" back in the 1960s -- a drop more or less to zero, but not a meaningful decline. That's basically good news for corporate profits. Companies can maintain earnings during a brief growth recession by cutting costs. And a modest rise in unemployment is also positive for corporate America, because it makes jobs easier to fill, and restrains labor costs. An uptick in unemployment is also likely to encourage the Federal Reserve to cut interest rates. The majority of Fedwatchers expect chairman Alan Greenspan to reduce rates at least a quarter percentage point at the next Fed meeting on May 15. The continuing trend toward lower rates will encourage home refinancing, which will add another $100 or $200 a month to some household budgets and help keep overall consumer spending healthy. What stocks are most timely at this point in the cycle? As I've said before, I think that the big money over the next five years will be made on the largest tech stocks. Nearer term, I think we could see strong performance among defensive consumer stocks -- the shares of companies that sell everyday products. No one is going to stop buying toothpaste or detergent because of a mild economic slowdown. And a whiff of inflation is actually good for consumer stocks because it makes it easier to raise product prices. One obvious candidate is Procter & Gamble [PG], with brands that include Tide, Ivory, Head & Shoulders and Charmin. The stock has dipped since I last recommended it, but since April 24, P&G has risen 12 percent. And I expect that rally to continue. P&G has a number of big issues. The company is in the midst of a restructuring, and it could take a while to work through all the kinks. In addition, P&G is bidding to acquire Clairol from Bristol-Myers Squibb. But over the next year, P&G should emerge from its restructuring as a more focused collection of extremely attractive businesses. What matters most now is that the stock is depressed and that sales won't be exposed to any significant economic downturn. This past week, P&G announced a surprisingly solid 9.4 percent gain in operating profits for the first quarter. Much of that was from price increases. Still, analysts thought the results were encouraging, and Salomon Smith Barney upgraded the stock to "outperform." Full-year growth this year and next may be only around 7 percent, but P&G's growth rate could be back above 10 percent by sometime next year. Add in a 2.1 percent yield, and you're talking about above-average total return potential. At a current price of $64 a share, P&G is trading at less than 21 times this year's estimated earnings. That's pretty cheap, and any successful results from the restructuring would just be gravy. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- MARKETPLACE ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. 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