Values return to the market

10/20/2008


While buying stocks may be the last thing on your mind, you should always be looking for opportunities. Unless you have abandoned stocks altogether — a decision history suggests is a big mistake — you need to be just as diligent in looking for buys in a down market as you are in an up market.

As a hedge, holding about 30% of your equity portfolio in cash seems prudent. With the other 70%, maintain a relentless pursuit for new and better stocks. Without constantly searching for new ideas, you will never know if the stocks in your portfolio truly represent your best ideas. Moreover, the market’s sell-off has opened some compelling buying opportunities in several high-quality growers, including the three Focus List selections reviewed below.

The U.S. government accounts for more than 70% of Harris’ ($38; NYSE: HRS) sales, and few customers are more reliable in a challenging economic environment. In October, Harris won a $140 million technical-support contract from the National Geospatial-Intelligence Agency. Harris already collects more than $600 million in revenue — 11% of company sales — every year from intelligence agencies.

To be sure, the future of the defense budget — and Harris’ profits — could be affected by the November elections. But both presidential candidates echoed recent calls to boost ground troops in Afghanistan, a move that should support demand for Harris’ tactical radios.

Harris shored up its credit before the market imploded, acquiring a five-year, $750 million unsecured line of credit in September. At nine times projected earnings in fiscal 2009 ending June, Harris looks cheap relative to both its history and its growth potential. Harris is a Focus List Buy and a Long-Term Buy.


Lockheed Martin ($96; NYSE: LMT), the country’s largest defense contractor, is the prime mover behind the F-35 Joint Strike Fighter, expected to become the jet of choice for both the Navy and Air Force over the next decade. Several foreign countries have also shown interest in the Joint Strike Fighter. With revenue potential of more than $300 billion over 35 years, the Joint Strike Fighter represents the largest defense contract ever.

While defense cutbacks or postponements are certainly possible, Lockheed has the financial flexibility to handle a slowdown in demand. The company maintains a healthy cash balance of $3.2 billion, or $8 per share, about twice the amount needed to cover a year of capital spending and dividend payments. In addition, new contracts keep rolling in. Yet the shares are down 20% from August highs and trade at just 12 times projected year-ahead earnings. Lockheed is a Focus List Buy and a Long-Term Buy.


Medical-equipment maker St. Jude Medical ($38; NYSE: STJ) benefits from a steady, noncyclical business mix. Best known for making defibrillators and pacemakers that treat cardiac disorders, St. Jude has expanded into the emerging field of neuromodulation. Implanted devices that send electronic current to the spinal cord to block pain sensations represent one of the company’s most attractive growth avenues. Already used to alleviate the tremors of Parkinson’s disease, neuromodulation devices may eventually treat patients suffering from depression, migraines, and obesity.

St. Jude topped consensus estimates in the September quarter, earning $0.57 per share, up 24% on 17% sales growth. Wall Street expects per-share-profit growth of 25% for 2008 and 13% next year. St. Jude Medical is a Focus List Buy and a Long-Term Buy.


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