Best five value stocks for 2009

Especially in markets like these, investors should use the depressed condition of the stock market, as well as our short-term bout with deflation, as a time to scout out solid value stocks for the long term. Such companies provide a bonus in a recessionary cycle – they preserve the value of your portfolio as well as offer the chance for a little growth when things improve (and some provide a nice dividend while you wait). Here are my five favorite value stocks for 2009.


1. Johnson & Johnson (NYSE:JNJ)
2008 Close: $59.83 Target Range: $65-$70

I feel JNJ is perfectly positioned for the down cycle. It participates in an industry –healthcare – that has seen massive growth over the past 25 years and will see even more growth over the next decade. But better yet, it does not have significant exposure to those areas of healthcare, like major drug companies, health-plan providers, and hospitals, where regulations and tired business models could introduce problems during the Obama administration. JNJ’s incredibly diverse product line of medical instruments, supplies, and equipment and its over-the-counter health and beauty products are perennial winners and will continue to be so in any economy.

Are the shares cheap enough to qualify for bargain status? I think so. At 13X earnings, they are currently trading slightly below the company’s five-year price-to-equity ratio range. That alone doesn’t necessarily signal a bargain in this market, but for a company as strong as JNJ, I would expect a “recession premium” on its shares as investors flee to safety.

The financial condition of the company is excellent with relatively low debt and high earnings. Its current dividend yield of over 3% is another benefit. I don’t see any downside for JNJ in 2009.


2. Procter & Gamble (NYSE:PG)
2008 Close: $61.82 Target Range: $65-$70

The profile for PG is very similar to that of Johnson & Johnson. Strong earnings anchored in world-leading brands across a diverse range of consumer products, products that are, by the way, recession-proof.

Like JNJ, Procter & Gamble is trading just below its five-year PE ratio. Its debt is manageable, and the earnings are strong and predictable. The average of analysts’ earnings estimates for 2009 have PG clocking in slightly lower than its 2008 numbers, but a still healthy $4.20 per share. Expect PG shares to trade in a pretty narrow range, providing some security and a dividend yield of 2.6% to cushion against any slight down trend in the trading range.


3. Philip Morris International (NYSE:PM)
2008 Close: $43.51 Target: $45-50

I like PM over and against its former parent, Altria Group (NYSE:MO), because of the international aspect of its operations and sales. Because of this, PM enjoys two distinct advantages: first, it participates in the only growth area left for the tobacco industry (international sales), as smoking tobacco declines in the US; second, it has a much smaller exposure to litigation than tobacco companies in the US. Better growth prospects and fewer risks add up to a better investment.

PM carries slightly more debt (long term debt to equity is 0.79) than PG and JNJ, but it does have the earnings power to lower that ratio significantly over time. Earnings are expected to grow from 3% to 6% this coming year and are already robust at about $3.35 per share.

Is it a bargain? Certainly not as much as PG and JNJ, but there is also more potential here for significant earnings growth over the next few years. At 13X earnings, its shares are priced at the top end of the industry’s range, and the company will need to boost earnings to see any real, sustained appreciation in stock price. That aside, the 5% dividend yield should help to cushion any lack of earnings growth in the short term.


4. Laboratory Corporation of America (NYSE:LH)
2008 Close: $64.41 Target: $67-$75

Essentially following a roll-up strategy of rapid-fire M&A in a consolidating industry, LH has emerged as essential player in healthcare; its national network of laboratories perform the routine and not-so-routine testing needed on daily basis by healthcare professionals. LabCorp is another healthcare play that reflects my desire to find companies that participate in healthcare’s growth without bearing many of the R&D risks associated with new therapies. While there will always be risks concerning a testing procedure

LabCorp is down about 17% since the beginning of the year; however, its all-weather business model and size should safeguard it against big losses in valuation, despite the pricing pressures that will be brought to bear against them by hospitals, physician groups, etc. Having said that, there are some concerns for LH. As with all roll-ups, there comes a time when there is nothing left to roll up. If growth is predicated merely on M&A prowess, then roll-ups eventually fall back down to earth in a burning heap. There is evidence, however, that LabCorp, in particular, is not a one-trick pony. LabCorp’s net margin has remained steady over the past five years, and it’s return on investment has risen from 21% to 26% over the same time period. A roll-up with nothing else to say for itself wouldn’t add value the way LH’s management has done. These guys seem to know what they’re doing. While growth on the order of 76% over the next five years isn’t likely, 20% to 30% isn’t out of the question. It will need it to stay in the value pocket of my portfolio, as there is no dividend to cushion short-term losses.

How cheap is the stock currently? Cheaper than it was. LH traded at a multiple throughout most of 2008 that I thought too high, but the October meltdown of the market has made LH acceptably cheap, if not an outright bargain.


5. Teva Pharmaceutical Industries Ltd (NASDAQ:TEVA)
2008 Close: $42.57 Target: $46-$52

Teva is a giant in the generic pharmaceuticals industry with a consistent track record of steadily increasing top- and bottom-line growth. The company is well positioned over the next twelve months to outperform both the market at large and its industry peers. It has a nice product mix on the market currently and a strong pipeline of future generic drugs. As the next presidential administration tinkers with the US healthcare system, the generic drug industry would appear to be poised for an excellent run.

The company’s financial ratios are acceptable. It has demonstrated a penchant for managing its cash well in the past, and there is nothing that would suggest trouble on the financial front. The company also supports a quarterly dividend in the 9-to-11 cents range.

Risk factors for Teva include regulatory problems relating to currently marketed drugs or those in the pipeline and patent litigation exposure from competitors. Also, failure to close its proposed acquisition of Barr Pharmaceuticals could introduce a short-term drag on earnings growth, but I expect the transaction to go through fairly soon.

Aside from that, I do think there are some mixed signals for Teva. Increases in the company’s earnings have slowed, and it is difficult at this juncture to say whether this is a product of the global economic slowdown or whether Teva is hitting the wall as a business. This matters because any successful drug company trades at a premium based upon the expectation of new products spurring high rates of bottom-line growth. Should Teva’s earnings growth slacken, it will take a heavy toll on the stock’s value, as I believe much of that future growth is already priced in.

Still, management’s ability to find new products (including via M&A) and new markets has been stellar over the past decade. Given management’s talent and the company’s strong financial footing, there is no reason yet to take Teva off the list of star companies. In a year which clobbered the indices, Teva has lost only a little over 10%...that speaks volumes of the company’s reputation and performance. I see Teva performing roughly in line with last year’s numbers with revenue growth in the 10% range, enough to support a similar percentage gain the stock valuation.