Grim economic news continues to send shivers through the stock market. News last week of a significant slump in the services sector sent the Dow Jones industrial average down 370 points in a single day.
Is any sector safe -- or any stock? After a steep drop in stock prices since October, some investors are starting to put money back into the market. But with uncertainty still looming over the economy and the market, investors need to be very selective in the stocks they choose.
Marcus Winbush of Breneman Winbush & Associates has started to add to his holdings after cutting stocks to about 25 percent of his portfolio last year. He plans to increase his stock holdings to 35 to 40 percent of the portfolio in the near future, but he is unlikely to go beyond that level until he sees some signs of a turnaround.
"I think stock valuations are attractive now, but I would anticipate a sideways stock market until the third or fourth quarter of this year," he said.
Much of his portfolio remains in cash and fixed-income investments, although he also likes the commodities market -- particularly agricultural futures, precious metals and energy. Although oil prices have declined sharply in the past two weeks, he expects oil to bounce back to more than $100 a barrel once the peak driving season returns.
In the stock market, Winbush says he still likes the medical services sector. His favorite Minnesota stock in that sector is UnitedHealth Group Inc. (UNH).
"Even in a recession, people still need health care. I think the outlook for this sector remains very strong," Winbush said. "We see UnitedHealth stock as a good opportunity right now. The stock took a hit because of some bad publicity [when CEO William McGuire resigned after an options backdating scandal]. But I think they have good management, good fundamentals and an attractive price earnings ratio."
UnitedHealth has a PE of about 14. Its stock was recently trading at about $48 a share, down about 15 percent from its 52-week high. The company has had strong revenue and profit growth the past few years. On the downside, Fitch Ratings recently downgraded the firm's long-term bonds from "A+" to "A," citing a higher than anticipated debt-to-capital ratio and concerns about the possibility of $1.3 billion in fines the company could face in California for allegedly handling insurance claims unfairly.
Another stock Winbush thinks should remain solid is Xcel Energy Inc. "We're not wild about the utility sector, but we believe Xcel (XEL) has good fundamentals and it pays a dividend of about 4.3 percent. There's not great upside growth with this stock, but we really like the dividend."
Xcel recently reported a 37 percent gain in fourth-quarter earnings, although profit was down 1 cent per share for the year, from $1.36 to $1.35 per share. Revenue was up slightly for the year, from $9.84 billion to $10.03 billion.
The stock closed Friday at almost $21 a share, down from a 52-week high of $25.03. It pays a dividend of 92 cents a share and has a PE ratio of 15.6.
The other Minnesota stock on Winbush's buy list is 3M Co. (MMM).
"The manufacturing sector in general is not that attractive right now, but we think 3M looks like a good long-term buy," he said. "It has a strong balance sheet, an attractive PE and a good dividend of about 2.3 percent. The other thing we like about 3M is that more than half of its revenue comes from overseas."
Closing last week at a little less than $79, 3M stock is about $18 below its 52-week high. It has a PE of about 14, and about two-thirds of its revenue comes from overseas.
3M's earnings and revenue have risen consistently the past few years, including an 11 percent gain in earnings per share in 2007, although last year's fourth-quarter profit trailed profit in the same period a year ago. Revenue rose 7 percent last year, to $24.5 billion.
Winbush believes the consumer staples sector could be another area of strength for the stock market, although he doesn't have any favorites in Minnesota. He likes Unilever, Procter & Gamble, Coca-Cola and PepsiCo. He advises investors to steer away from retail stocks, such as Target Corp. and Best Buy Stores Inc. in the near term, because consumers are less likely to open their pocketbooks in a down economy.
"This is not the time to buy those stocks," he said.
With bad economic news seemingly a weekly event, this is a difficult time to get excited about the stock market. But the best bargains are often available to bold investors who are willing to buy when everyone else wants to sell.