Prosperity may be just around corner

The stock market has been sending a series of mixed signals recently -- a few days of strong gains followed by a few days of discouraging declines. This is what Wall Street refers to as a "sideways market" -- and it's exactly what many analysts had predicted.

Those mixed signals mirror the conflicting signs coming from the economy. On one hand, the subprime mortgage mess continues, gasoline prices are heading toward $4 a gallon and the value of the dollar is falling as fast as the deficit is rising.

On the other hand, earnings reports from companies across many segments of the economy have been respectable, balance sheets are generally strong and globally positioned companies are enjoying a competitive advantage because of the lower dollar. And the economic stimulus measures taken by the Federal Reserve and Congress -- tax rebates and lower interest rates -- are taking hold.

"It's very hard for the market to hold gains now, which is not surprising, given the economic environment," says David Koch, director of equity management for Minneapolis-based Windsor Financial Group. "We've been in a recession since last fall, with nearly flat economic growth. But corporate earnings are holding up very well except in the financial sector, and cash flows and earnings yields have been very strong."

Koch says the continued strength of the global market has also helped U.S. companies weather the slowdown. "There has been some decoupling of the U.S. economy from the rest of the world. Ten years ago, if the U.S. got a cold, the rest of the world would get sick. Today, if the U.S. gets sick, the rest of the world gets a cold."

When will the economy start to improve? Koch believes it could be just around the corner -- particularly if the Fed rate cuts and the stimulus package give the economy a boost. "We're cautiously optimistic that we'll see some improvement in the second half of this year."

Timely stocks

With the stock market down about 10 percent from its high in October, this could be a good time to start selective stock-buying, Koch says. "We're looking for companies that are able to execute in all economic environments, have good cash flow and have little or no debt."

An example would be Emerson Electric, which owns Minnesota-based Rosemont Engineering. The company, which manufactures industrial automation, process-management equipment and related products, has a strong balance sheet, good cash flow and growing earnings. "The weak dollar has been a big benefit for Emerson, because it generates about 60 percent of its revenue outside the U.S." Emerson (EMR) closed Friday at $54.18, down from its 52-week high of $59.05. It pays a dividend of about 2 percent.

Another stock that fits that pattern is Eden Prairie-based MTS Systems (MTSC), a manufacturer of materials-testing equipment and related products. The firm recently acquired Sans Group, a China-based manufacturing firm.

"MTS is a smaller-cap company, and those stocks haven't done as well recently, but this is an example of a company that continues to expand it global footprint," Koch says. "More than 60 percent of its revenue comes from outside the U.S."

Last week, MTS announced a $25 million stock buyback plan. The stock was recently trading at about $34 a share, down from its 52-week high of $47.45.

Koch's other regional favorites include:

Manitowoc Co. (MTW). Based in Manitowoc, Wis., it is the world's largest crane manufacturer. "They have a wide presence in all parts of the world, and they've really benefited from the global infrastructure expansion." The stock gained $1.32 Friday, to close at $40.82, down from a 52-week high of $51.49.

Target Corp. (TGT). Like all retailers, Target stock has been sagging lately, but Koch believes that it should bounce back as the economy recovers. "We've been pretty cautious of the consumer area recently, but we think the monetary and fiscal stimulus plans may start to turn the economy around." Koch also believes that Target's recent sale of nearly half its credit card receivables for about $3.6 billion should help its bottom line. "The company got a premium price," he says.

Target stock closed Friday at $52.24, down from its 52-week high of $70.75.

General Mills (GIS). "The foods sector has not been a high-growth area, but General Mills has delivered increasing earnings in a very tough environment. Part of its growth has come from new products that focus on health and wellness," Koch says. The stock was trading Friday near its 52-week high, closing at $60.82.

In the utility sector, Koch likes Xcel Energy (XEL) and Wisconsin Energy (WEC). "Both have done a good job of delivering solid earnings and they both pay a good dividend yield," Koch says. Xcel pays a dividend of about 4.3 percent; Wisconsin Energy pays a yield of about 2.3 percent.

In the financial sector, Koch believes that Wells Fargo (WFC) and U.S. Bank (USB) may be reasonable values. "The financial sector continues to be filled with land mines, but I think a lot of the bad news is priced into the sector and into the prices of those two banks," he says. "And they pay nice dividends and those dividends appear to be safe." Wells Fargo pays a 4 percent dividend yield; U.S. Bank pays 4.9 percent.

Gene Walden is the author of more than 20 books about business and investing. He lives in the Twin Cities. Send questions or comments to: gwalden100@comcast.net, or visit Allstarstocks.com.