Now that we’re past the Labor Day weekend, Wall Street has returned to work in force and is setting its sights on the last four months of the year. This year, there are an unusual number of factors to consider — the most important being the health of the U.S. economy, as well as the debt problems in Europe and here in the U.S.
My own belief is that the U.S. economy will avoid a second recession and continue to grow, albeit it at a slower rate than all of us would like. Here in September, one of the keys will be how many companies pre-announce earnings disappointments and lower expectations. I’m sure we’ll also see Wall Street analysts downgrade estimates.
However, this does not necessarily mean lower stock prices will follow. After this summer’s volatile sell-off, lower earnings expectations already are priced into stocks across the board — from the big caps to the small fries — and I expect the stock market to finish the year in positive territory.What to Buy
With that in mind, here are a couple of my favorite ways to play the last four months of 2011:
Beaten-down names: I would not be afraid of buying good stocks that have sold off sharply but still have strong potential just because they might miss earnings estimates by 5% to 10%. Among the names I like are engine maker Cummins (NYSE:CMI) and financial powerhouse Goldman Sachs (NYSE:GS).
Rotation out of gold and bonds: Whether the bond and gold bubbles burst outright or some of the air merely comes out, money sold from these assets will need to find a home once the frenzy dies down and they seem less valuable than when it looked as if the financial system was imploding. This home will be in quality companies with current strong dividend yields and ones that will grow over time. Anemic interest rates just don’t match the yield on some of the blue chips, which could act like a bond surrogate for investors.
I expect investors to flock to names such as Verizon (NYSE:VZ) and Bristol-Myers Squibb (NYSE:BMY) in the U.S., as well as international big-cap names with outsized dividend yields such as Telefonica (NYSE:TEF) and BP (NYSE:BP).What to Avoid
In what promises to be an active finish to 2011, there also are high-risk areas I would stay away from right now. Keep this in mind both when buying or selling individual stocks, as well as in examining your exchange-traded funds and mutual funds, as too often investors don’t realize how much exposure they have to certain companies and sectors.
One big area of concern is defense spending, which might see fairly big cuts. Among the companies most impacted could be those that make fighter aircraft and tanks — the big, heavy fighting machines we’ve used in Iraq and Afghanistan for close to 10 years now. No matter how stellar and well-respected these defense contractors are, look for a decline in revenue for companies such as Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and General Dynamics (NYSE:GD).
Here’s a looming international concern that is easily overlooked in all of the attention given to Europe’s debt problems and the health of European banks: China. In June, many local governments in China had to be bailed out by the central government in amounts that were five times the funds paid out in the U.S. TARP program (on a GDP-adjusted basis). This was due mainly to unsuccessful economic projects.
Greater caution and tighter credit following these souring investments could lead to a greater-than-anticipated slowdown in the Chinese economy, potentially hurting some U.S. companies with significant exposure to China, as well as commodity prices for such items as steel and copper. I’m still bullish on China over the long term, but the next few months could be bumpy, so beware companies like U.S. Steel (NYSE:X) and Freeport-McMoRan Copper & Gold (NYSE:FCX).
There are a lot of crosscurrents buffeting stocks these days, so as we finish out 2011, it’s important that investors be selective.
Kramer owns shares of Goldman Sachs.