2 Stocks that Are Up During this Market Downturn

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Performance is relative. If a stock manages to move sideways or modestly rise when most stocks are plunging, then investors should be pleased. Better yet, these are precisely the kinds of stocks that tend to outperform when most other stocks simply stabilize. We're not there yet, but we're getting awfully close. So it pays to take a close look at the companies showing impressive relative strength to find clues as to where to focus your investing dollars. And even though the past few sessions have been up, the market need not rally for these S&P 500 stocks to move ahead.

One way to buck the tide: find a buyer. Google (Nasdaq: GOOG ) offered a $12. 5 billion dowry for Motorola Holdings (Nasdaq: MMI ) in July, helping that stock to rise 60% in the past three months. It also helps to offer a fat dividend to entice investors. Utilities and tobacco stocks held up very well in the third quarter, thanks to their hefty payouts.


 
But it's unwise to expect further appreciation for these stocks. In most instances, their dividend yields are simply too small to entice high-yield investors. And in a more stable market, the unwinding of the " flight to quality " trades may cause these stocks to lose some appeal, especially if investors move back farther out on the risk curve.

But there are a dozen other stocks that have managed to rise in an otherwise tough market. Which of these are poised for further gains as the market stabilizes?



To expect continued gains for gold producer Newmont Mining (NYSE: NEM ) , which at one point was up more than 30% in the quarter, you have to have a very bullish outlook for gold prices. Why has Newmont done far better than its peer group? Because it announced plans in July to make major investments in Peruvian and Australian mines that should set the stage for 7 million ounces in annual gold production by 2017. Of course, high gold prices would be necessary to generate the cash flow to fund these projects. Is gold headed back toward the $2,000 per-ounce mark -- or higher? That's not a wager I'm personally looking to make. [See my piece: " 2 Major Reasons Why Gold Prices Could Continue Tumbling "]

In a similar vein, I remain in awe of Apple (Nasdaq: AAPL ) , which tacked on another 9% in the last quarter (even after a $40 pullback since Sept. 20). And the stock is surely cheap at less than 10 times next year's earnings when cash is excluded. But I remain fearful that the company's business model is near a peak as cutthroat competition in the consumer electronics market will eventually crimp growth and margins.

Yet there are a few names that look quite appealing -- even in these tough times.

1. VF Corp. (NYSE: VFC )
If you're on the prowl for companies that can benefit from rising consumption in emerging markets such as India, Russia, Mexico, Brazil and China, then you should know this name. VF owns brands such as Timberland, Wrangler, Vans, the North Face and others. These are iconic U.S. brands, synonymous with the "great outdoors." And they're quickly gaining adherents in emerging markets.

The June 2011, acquisition of Timberland in particular is turning this into a solid move. Aided by that deal, sales are expected to rise 20% this year and another 20% in 2012 to about $11 billion. Equally important, management has proven quite savvy in managing costs through better procurement of raw materials. Gross margins are on track to rise from 44% in 2008 to 46% this year. With such a large sales base, a 200 basis point increase in gross margins really fuels the bottom line . Notably, cotton prices had been surging, but have recently pulled back, which should yield further margin gains in 2012.

Merrill Lynch, which upgraded its rating on VF from "neutral" to "buy" in late September, figures the company can leverage its strong brands and solid cost controls into healthy free cash flow , projecting a rise from $600 million this year to $1 billion by 2013. It also predicts shares will rise to $140. That may only be 15% above current levels, but this potential return also comes with a fairly low degree of risk and volatility.

2. Bristol-Myers Squibb (NYSE: BMY )
Faced with a never-ending onslaught of patent expirations and tepid new drug pipelines, investors have come to see Big Pharma as a no-growth industry. There is one notable exception: Bristol-Myers Squibb, which has less exposure to imminent patent expirations and a fairly robust pipeline of new drugs waiting in the wings.

To be sure, the quarters ahead will be a challenge. Sales are expected to drop 13% in 2012 to $18.3 billion, while earnings per share ( EPS ) could slump by a similar amount, from $2.28 to $2.06 in the same period. From there, business should improve markedly. Goldman Sachs estimates a string of new drugs should hit the market beginning in 2012, which will likely eventually constitute 70% of sales by 2016. (Notably, new drugs tend to carry the highest profit margins.) Goldman's analysts say "Street forecasts underestimate the margin implications of BMY's burgeoning new product lineup, which should lead to significant upside in the 2014-2016 period." Goldman sees shares rising from a current $31 into the upper $30s once the rest of Wall Street starts to appreciate the company's coming turnaround plans. Coupled with a current 4.3% yield, this stock offers income, stability and growth all in one platform.

Risks to consider: Some of these stocks have rallied simply because they are seen as safe havens during stormy times. As the market calms, these "flight to quality" names may lose some appeal.

Action to Take --> A key theme of these stocks is that they appear to be well-positioned to grow in an uncertaineconomy . In addition to VF Corp. and Bristol-Myers Squibb, companies like health care solutions provider Cerner (Nasdaq: CERN ) should see increasing adoption for their goods and services. But price still matters. Cerner, at 30 times projected 2012 profits, appears fully-valued, so it should be watched in case of a pullback.


-- David Sterman

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas

Referenced Stocks: AAPL , BMY , CERN , EPS , GOOG

David Sterman

David Sterman

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