Adviser sees fourth-quarter comeback

The minutes from last month's Federal Reserve meeting indicated a fairly defined rift over the timeline of a recovery, with some Fed members suggesting the economy could be well on its way to recovery by the end of this year while others feared the recession could last well into 2010.

But some good news last week helped extend the stock market rally and shed some new hope on what had been a very dour outlook. Wells Fargo projected a $3 billion profit for the first quarter, which was the best news from the financial sector since the financial meltdown began. More than 60 banks have already closed this year, but if the banking sector can bounce back, credit and lending markets will improve. That should have a broad positive effect on nearly every sector of the capital-starved economy.

Although unemployment has continued to rise, other bits of news provide faint hope that things are turning around. The housing market is finally showing some signs of life and consumer spending has started to stabilize.

"We are now moving past the period of maximum weakness in the economy," says Keith Tufte, president of Eden Prairie-based Longview Wealth Management. "The economic news has gone from 'all bad' several months ago to a mixture of good news and bad news. I think the economy will stabilize in the third quarter of this year with positive economic growth in the fourth quarter."

The current recession, now in its 17th month, is already the longest since the Great Depression. "I think the passing of time should help," says Tufte. "Ultimately, the economy starts to self-correct as people start buying again and the inventory cycle picks up. That, along with the government's stimulus plan and the financial stimulus to increase the money supply, should help stabilize the economy and businesses."

An improving economy should keep the stock market on the upswing. "History shows that the stock market tends to bottom in the middle of a recession, which is about where we are right now," he says. "I think there is a good chance that the market lows from early March will prove to be the lows for this cycle. We have had a very strong 20 percent-plus rally from those levels over the past month. The four-week bounce of 23 percent was the largest since 1933."

Favored sectors

What sectors could benefit most from an economic upswing? Tufte believes energy, technology and health care stocks could lead the rally.

Energy stocks have dropped along with the price of oil -- which has gone from $147 a barrel to around $50. "In my opinion, there is now more upside than downside over the next two to three years. When the U.S. and global economies come back in late 2009 or 2010, demand for oil and energy will increase and will likely push the price of oil back up significantly."

Technology stocks have also been hit hard by the recession, but Tufte believes they could experience a strong rebound because many of the leading technology companies still have strong balance sheets and a growing global market.

Many of the leading blue chip stocks in the health care sector also saw a decline in share price of 50 percent or more from top to trough, even though many of those businesses remained solid. Tufte points out that the health care industry is typically safer and more stable than most sectors and should benefit in the years ahead from the aging population.

Among his favorite Minnesota stocks are C.H. Robinson, Ecolab and Best Buy.

C.H. Robinson (CHRW) is an Eden Prairie-based logistics operation that provides freight hauling services worldwide for a variety of industries. The stock is down from its high of about $67 a year ago to its Thursday closing price of $48.25. Tufte points out that the company has a strong balance sheet, with no debt and $500 million in cash, a 33 percent return on equity, and a dominant position in its industry.

He likes Ecolab (ECL) for many of the same reasons -- a strong balance sheet, steady cash flow, a 25 percent return on equity and a dominant position in its industry. "I also believe it has a good opportunity to grow through acquisitions in this environment," Tufte said. Ecolab shares ended the week at $36.97, down from their 52-week high of $52.16.

Best Buy (BBY) has already had a strong rebound from its low of about $16 to its recent price of $41.09 -- and is already moving up toward its 52-week high of about $48. "Best Buy will benefit significantly from the demise of its primary competitor, Circuit City," says Tufte. "That should be a big positive for Best Buy for the next few years. It is now the nation's only large pure play electronics retailer with huge size advantages over its other competitors."

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