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Safe havens: Battered blue chips
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October 18, 2001: 11:27 a.m. ET
Even if economic woes hurt results in the short-term, they'll bounce back.
By Lisa Gibbs and Jeff Nash
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NEW YORK (Money) - Beaten-down big caps with the financial power to weather the inevitable downturns in business can offer investors spectacular rewards when the economy recovers. "I'm looking to buy very-high-quality companies that people have jettisoned from their portfolios because they're overly concerned about the short-term outlook for the economy," says David Brady of Stein Roe Focus.
One stock Brady has always wanted to buy but didn't -- until recently -- is General Electric (GE: down $0.10 to $37.15, Research, Estimates) . This time last year, the stock traded at 41 times estimated 2001 earnings. But recent market events have knocked its P/E down to around 24 times estimated 2002 earnings. A 20 percent premium to the S&P 500's average '02 P/E is not too much to pay for GE's famous earnings consistency.
No question here: Softening spending will hurt many of GE's businesses next year, from plastics and appliances to aircraft engines and NBC. But its power-systems and medical-systems units remain strong, and new CEO Jeffrey Immelt recently told analysts that he expects earnings to rise 11 percent in 2001 and at least 10 percent in 2002 -- not the 16 percent pace of recent years, but not at all bad, considering.
Moreover, GE (especially its asset-rich finance units) has the cash to help ride out rough times and even capitalize on things by buying other companies on the cheap. "You can own this stock for five years or 30 years," Brady says.
A maker of chemicals and plastics for manufacturers would seem a distinctly unsafe place to invest during a slowdown. But value managers trolling for bargains in late September were putting money into Dow Chemical (DOW: up $0.80 to $34.70, Research, Estimates) .
The company has been warning all year that it won't make earlier earnings estimates, and management expresses caution about 2002, but Charles Mayer, director of value and fixed-income investments for Invesco, says Dow's merger last February with Union Carbide will yield significant savings and increase the company's geographic and product diversification. "Meanwhile," he says, "I've got a 4 percent yield to pay me while I wait."
It's been a bad year for Citigroup (C: up $0.82 to $46.67, Research, Estimates) . The bear market hurt its underwriting and brokerage businesses, and the World Trade Center attack is expected to cost the company upwards of $700 million in insurance claims and losses as a result of closures of the stock exchange. But at more than 20 percent off its 52-week high, this stock has been oversold.
A global financial services giant, with tentacles in everything from mortgages and credit cards to insurance and investment banking, Citigroup still has the ability to grow earnings in the mid-teens this year, and its P/E right now is a temperate 12.5. "This is a company serving 100 million customers in 100 countries," says Larry Puglia, manager of T. Rowe Price Blue Chip Growth. "This is a perfect example of growth at a reasonable price." 
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OTHER SAFE HAVENS
