Recession is time to shop for bargains

"I don't think anyone knows how long this will last," said David Koch, chief investment officer of Minneapolis-based Windsor Financial Group. "Our best guess is that it will last through 2009 and it should start to get better in 2010."

"The average duration of a recession is about 11 to 12 months, but we think this recession is much deeper and more severe than most and should last much longer than the average recession," Koch added. He believes several things need to happen before the economy starts to turn the corner:

• "A massive financial stimulus package by the government" needs to be passed.

• There needs to be better access to credit for consumers and business.

• Interest rate spreads need to narrow between corporate and government bonds. Junk bonds currently are yielding around 20 percent or more and investment-grade corporate bonds are paying in the range of 5 to 7 percent, while 5-year U.S. Treasury bonds are paying only about 1.5 percent.

• Housing needs to stabilize.

• Financial sector write-offs need to decline.

While it may take another year or two for the economy to begin to turn around, Koch believes the stock market will begin to recover well before the economy.

In the meantime, investors might consider putting some money into corporate bonds of "those companies with strong balance sheets, sustainable revenue and cash on the balance sheets." He likes Caterpillar, which recently issued a five-year bond at 7 percent, and DuPont, which issued a 6 percent bond for five years.

The 40 percent decline in stocks over the past 14 months could be a buying opportunity for investors with a long horizon. Although the market may not begin to recover for a year or more, when it does bounce back, many stocks could enjoy a substantial rebound.

"The devastation of the market has led to equity prices that are lower than we've seen in a long time," Koch said. "But just because a stock is cheap doesn't mean it can't get cheaper."

However, there are some positive signs when comparing today's stock prices with historic trends.

The average yield of the S&P 500 is about 3.2 percent, compared with the 3 percent yield of 30-year Treasury bonds. "We haven't seen that in several decades," Koch said. "It's another indication that dividend stocks and corporate bonds are attractive versus Treasuries."

Koch suggests looking for companies with strong balance sheets, recurring revenues and the ability to increase dividends. "Health care, utilities and consumer staples typically weather the downturns better than the rest of the market," he said.

Among local health care stocks, Koch feels Medtronic and St. Jude Medical have the potential to bounce back from steep declines. Medtronic closed Friday at $29.91 -- down from the year's high of $56.55 Aug. 21 -- and St. Jude closed at $31.34, down from the year's high of $48.22 July 17.

Among utilities, he believes Xcel Energy and Wisconsin Energy could both be good long-term buys. Xcel, with a dividend of about 5.3 percent, closed Friday at $18, and Wisconsin Energy, with a 3.3 percent dividend yield, closed Friday at $41.82.

In the consumer staples sector, Koch said "General Mills did a good job of weathering the trend in rising commodities."

As the economy emerges from the recession, he believes that companies focused on rebuilding infrastructure will be among the leaders, including Donaldson, Caterpillar and Manitowoc, a Wisconsin-based crane manufacturer.

He also likes Alliant Techsystems, which has performed well, but still trades "in a very modest range."

Koch is cautious regarding consumer-related stocks, but believes companies focused on cost-conscious consumers, such as Target, could do well.

"When we do recover, I think it may also be led by the energy sector," he said. "When the economy picks up, so will the demand for energy." Leaders in that sector include Exxon and Chevron.

Koch said companies with significant foreign sales could be hurt in the near term by the stronger dollar, "but we expect the dollar to weaken eventually and that will help their bottom line earnings."

How long before the market recovers to prerecession levels? That, Koch said, might take three to five years.

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