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Stocks That Shine in a ‘Zombie Economy’

Marc Courtenay|Contributor
Monday, 9 Jul 2012 | 11:54 AM ET
Francesco Carta Fotografo | Flickr | Getty Images

The hardest time, emotionally speaking, to buy even the best-of-breed companies’ stocks is when fear levels are rising and rational logic is being thrown out the window.

That’s the scenario right now in the financial markets of the world, and the “scared-e-cat” contagion has taken hold again on Wall Street USA.

Yes, the jobs report on Friday was as bad, if not worse, than many of us were anticipating. For the third month in a row, the number of new jobs created was well below the 100,000 level.

For June, it was around 80,000 jobs and that was after May’s disappointing 77,000 payrolls and April’s even scarier 68,000 number, making the second quarter the worst quarter for jobs in two years.

Right now, the most powerful voices in the world of financial media are coming out with headlines and stories that make investors as nervous as a long-tail cat in a room full of rocking chairs.

A good example of this is a CNBC story, “Signs We are Approaching a Zombie Economy.” If I have my terminologies correct, a zombie is also known as “The Walking Dead”! Yikes and horrors!

The story has some blood-curdling quotes, guaranteed to tempt investors toward the exit doors and emotionally charged to push the “sell” buttons.

CRT Capital Senior Treasury Strategist Ian Lyngen said the economy feels zombie-like. “The risk taking animal spirits have yet to return,” he said.

As I’ve been pounding the table and saying lately, the potential for using the debt crisis in Europe as yet another good dose of fright in order to justify a chilling plunge in stock prices continues.

“The U.S. economy has been unable to achieve escape velocity, but the amount of monetary and fiscal stimulus in the system has proven adequate enough to keep it going at a 1 percent to 2 percent (gross domestic product) pace. That is slow by historic recovery standards ... it feels like a ‘zomb’-economy,” said Lyngen. “People are increasingly worried about a double dip.”

Ah yes, that’s the perfect storm for the kind of stock market mayhem needed to do two things. One, it allows the already beaten-down bargains to fall to even more ridiculously low price levels.

Second, it gives the Federal Open Market Committee and Ben Bernanke just what they need to do, and like Mighty Mouse — are you old enough to remember the cartoon series? — they’ll yell, “Here I come to save the day!”

But when will the Fed’s rescue operation begin? Every analyst I’ve spoken to or read about seems to think it won’t happen until September for political reasons.

By the way, I love another quote from the CNBC article that gives us a metaphor of what the worldwide financial malaise could be likened.

“Credit Suisse economist Jonathan Basile had another description: ‘It’s like trying to sprint through molasses. It’s great for conditioning, but it’s hard as hell,’ he said. Like an athlete, ‘sometimes when the economy runs too slow, it feels like it hurts.’ ”

Basile apparently “... expects the Fed to jump in and help out the economy, announcing another round of quantitative easingat its Sept. 13 meeting.

“They tend to do their job, and their job in their eyes is to do what they need to do for the broader economy,” he said. “The Bernanke Fed is not one to sit on its hands.”

My best educated guess is that Bernanke will wait until the September FOMC meeting, unless he replays the big QE2 announcement he made in 2010.

That’s when he surprised everyone (during a mid-term congressional election year) and made the big announcement at the Fed’s annual retreat in Jackson Hole, Wyo., in late August.

Will history repeat itself? Are Bernanke and the Federal Reserve’splans that consistent and predictable? My instincts tell me they aren’t, but my experience says it’s a distinct possibility.

Either way, sooner or later an announcement will be made. The more unexpectedly positive and surprising it is, the more ebullient the upside market reaction will be.

Playing the Rally

So if you want to participate in that jubilant rally, prepare by looking at companies such as Freeport McMoRan Copper and Gold and Goldcorp.

Freeport had a nice move higher recently and may be in the process of retracing that advance. The 50-day moving average price as of July 6 is just above $34. The most recent low was $31.41 on June 26.

A 50 percent price retracement from the July 5 intraday high of $36 from the June 26 low would bring the price of Freeport down to $33.71, which would be a reasonable entry target price.

With the current (and recently raised) annual dividend of $1.25, that would bring the yield-to-price up to 3.7 percent if we could buy Freeport at $33.71.

After all, it’s the world’s largest copper producer and it produces more than 20 percent of its earnings from its gold production. Both copper and gold will feel the effect of global monetary easing and economic stimulation programs.

With $4 billion of levered free cash flow (trailing 12 months) and a payout ratio of just 37 percent, the dividend at Freeport is well covered.

The fact that the stock is selling at a current price-to-earnings ratio below 9 and a forward price-to-earnings ratio below 7 reminds us that it’s trading at the low end of its 52-week range.

Goldcorp, which claims to be “... the fastest growing, lowest cost gold producer ...,” is selling for less than 12 times forward earnings.

As Casey Research recently stated in its Big Gold report: “There are many reasons why we like (Goldcorp) — low cash costs, low political risk, and the biggest projected growth of the seniors. Check out how well management has grown cash flow over the past five years. This trend will continue a result of both greater production and rising gold and silver prices.”

Goldcorp will discuss second-quarter results on July 26 along with a conference call.

From its recent low of $32.16 on May 16 it rallied to $40 and may now also be correcting and retracing that price path. A 50 percent retracement from its June 14 high of $40.44 would bring the price to around $36.30. It closed July 6th at $37.76.

Like the 30 stocks that make up the Dow Jones Industrial Average as represented in the SPDR Dow Jones Industrial Averageexchange traded fund , Freeport and Goldcorp will spring back to life after the current market bloodbath has run its course.

Calmer heads will eventually prevail, and those who accumulate these great stocks while “the blood is running in the streets” will be nicely rewarded before 2012 comes to a close.

—By TheStreet.com Contributor Marc Courtenay

Additional News: Investors Brace for Shaky US Earnings Season

Additional Views: Dennis Gartman: Major Shift in Gold Trade

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, Marc Courtenay was long FCX and GG.

Disclaimer

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