Stocks For The New "Normal"

By Sham Gad | November 06, 2009 AAA

The term "new normal" was penned by the folks at PIMCO, the giant fixed income asset management firm. It's a belief that the future years ahead for the economy will settle into a new normal environment of relatively high unemployment, reduced corporate growth and earnings level and a continued relationship between private and public enterprise. In other words, continued government support in many industries.

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Embrace It

Considering that the only signs of life in the housing, mortgage and auto industry are a direct result of government aid, the possibility of a new normal economy is more than just a probability, it's happening now.

Whether or not it's the optimal solution is unfortunately irrelevant at this point; without it, no mortgages would be made and the auto industry would be facing Armageddon. Talk to any mortgage professional and they will tell you that nearly all their business is a result of government backing and they don't want it to go away.

Investors would be wise to embrace this environment and keep it in mind when looking at potential investments.

Do I Need It?

If the answer to the above question is anything but yes, then you need to have a very compelling reason to invest. Jeweler Tiffany's (NYSE:TIF) is arguably one of the more quality retail outfits in the country. The company grew its sales every year since 2000 up until 2009. Over that same time, the company has reduced shares outstanding from 145 million to 124 million. Even today, the stock is trading near a yearly high and for 32 times earnings.

Yet, as much respect as I have for this company, I wouldn't touch it today unless the stock price was low enough to account for the fact that the next few years might be the most trying for retailers. Make no mistake, Tiffany's will do fine and be around to prosper again, but I can't handicap the investment bet for this company in this economic environment. (For more, see Where Top Down Meets Bottoms Up.)

While other retailers may suffer somewhat from this fallout, there are some that receive a constant flow of demand. The most obvious example would be a company like Wal-Mart (NYSE:WMT), which alone builds a case to avoid other retailers, except for maybe Target (NYSE:TGT). Wal-Mart's future looks very promising going forward since its entire business philosophy hinges on low prices.

However, shares are actually down about 10% YTD despite the rally in the market. Wal-Mart is not going to give you 30%-40% annual returns, but while it's severely lagging the S&P 500 this year, over the past two years Wal-Mart is up 15% while the S&P is down 30%. And if you're a serious investor, the long-term is what counts.

Fertilizer businesses, like Agrium (NYSE:AGU) which currently trades at less than 10 times earnings, make an essential product that helps farmers feed more people on fewer acres of land. That's a long-term trend that will continue in any economic environment.

The Bottom Line
The most important factor to consider before investing in any business is the price you pay per share of stock. If you pay a high price it doesn't matter what you buy. But if a company can't find a way to grow and make itself more valuable you may be stuck with a stagnant stock. Those businesses have some pretty tough odds stacked against going forward and that could remain for some time. (For more, see The Value Investor's Handbook.)

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