'New Economy' Investment Considerations

By Sham Gad | June 16, 2009 AAA

It now appears that our economic system is not dead. When Lehman Brothers collapsed last year and the markets went into a free fall, emotions ran wild as investors wondered whether we would survive this mess. While our history provides proof of the American economy's resilience, that wasn't the sentiment in the fall of 2008.
IN PICTURES: Eight Ways To Survive A Market Downturn

A New Economy...
Now in the middle of a nice rally, investors may be tempted to let their guards down and think all is well again. While it appears that financial Armageddon is off the table now, the U.S. economy still has problems that won't go away soon. In thinking about the landscape that will define our society for the foreseeable future, I see the following main characteristics:

1. Prolonged period of reduced discretionary consumption by U.S. consumers as evidenced by the sharp rise in the U.S.savings rate;

2. Lower reliance on the use of credit to fuel spending;

3. A sharp adjustment in spending priorities for American households; and

4. A slower than anticipated housing recovery as long as unemployment remains over 6 percent.

...Means A New U.S. Consumer
The above characteristics share a common theme: The U.S. consumer has been badly burned from this recession, and those painful lessons won't be forgotten next month or next year. Remember your Depression-era grandparents? (For more, see Survival Tips For A Stormy Market.)

Solid Investment Plays
There are investment opportunities today that offer even the most conservative investor attractive returns in lieu of simply holding cash.

Look at Kraft Foods (NYSE:KFT). It's a household name that makes food products, which are essential to life. Granted, there are always substitutes for Kraft's products, but the company's deep product line ranges from higher-end DiGiorno pizza to average Joe Maxwell House coffee to the irreplaceable Oreo cookie. In short, Kraft is a safe New Economy investment. Even more attractive is the 4.5% dividend yield - as safe a payout as you could ask for since the company makes its money supplying grocery stores. You are also investing with first-rate company: Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) owns over 9 percent of Kraft. (For further reading, see Recession-Proof Your Portfolio.)

Auto Parts
Next up is AutoZone (NYSE:AZO), a bread-and-butter play in this economy. In 2008, when the S&P was down nearly 40%, AutoZone was up over 10 percent. As more and more Americans opt to keep their cars on the road longer and forego purchasing a new vehicle, sales of spark plugs, oil filters, brake pads and batteries will continue to increase. Few will dispute that it is far cheaper to fix a repairable car than to purchase a new one.

Since 1999, AutoZone has increased its profits nine out of 10 times. The company knows efficiency like no one else. While sales have grown from $4.1 billion to $6.5 billion over the past 10 years, net income has leaped from $244 million to more than $640 million over the same period. More and more used cars is good for AutoZone, and at a P/E ratio of 13, shares are fairly priced for a company that should grow at a better-than-average clip.

AutoZone's next-biggest competitor is O'Reilly Automotive (Nasdaq:ORLY), and its shares are changing hands at 23 times earnings. More so, AutoZone's most recent numbers show that it earned $665 million in profits from $6.8 billion in sales, while O'Reilly earned $186 million in profits from $3.56 billion in revenue.

Coming Up Next
Because AutoZone and Kraft are stable blue chip companies, they don't qualify as deep bargains. I wouldn't expect 50% annual returns from them as you might get with other opportunities in today's market. But you do get very durable businesses that can continue to grow even in weak economic environments, and they will most likely perform better than the overall market while affording investors an exceptionally high degree of safety.

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