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Safe havens: The tried and true
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October 18, 2001: 11:30 a.m. ET
Food and healthcare stocks are relatively immune to economic swings.
By Lisa Gibbs and Jeff Nash
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NEW YORK (Money) - In times of crisis, investors typically turn to companies with predictable earnings. During the gulf war -- which, you'll recall, coincided with a recession -- Salomon Smith Barney's index of food stocks like General Mills and Kellogg bested the S&P 500 by 17 percentage points. But this time around, food stocks have already enjoyed a run-up.
By the time the New York Stock Exchange resumed trading on Sept. 17, the food index had outperformed the S&P by 68 percentage points since February 2000. The result: Companies like Pepsi and General Mills trade near their 52-week highs, and some food stocks, such as Heinz, boast P/E ratios that are more than twice their expected rate of earnings growth. (Many stock pros like their price/earnings-to-growth ratios closer to 1.)
A better way to play the food business: Kroger (KR: down $0.16 to $24.84, Research, Estimates) , the nation's largest supermarket chain, with nearly $50 billion in sales and U.S. market share approaching 10 percent. Kroger's clout helps it squeeze better terms out of foodmakers and in turn to offer goods to customers at cheaper prices than its smaller competitors can. The company expects to increase earnings 17 percent in 2002 and 15 percent in 2003, yet the stock trades at less than 14 times projected 2002 earnings. "Kroger is the type of company we look for in any environment," says Bill D'Alonzo, co-manager of Brandywine Fund.
Likewise, Kimberly-Clark (KMB: up $1.01 to $53.25, Research, Estimates) , maker of Huggies diapers, Scott toilet paper and Kleenex tissues, currently represents the best value in the household-goods field. Its P/E (about 16) is roughly 1.7 times next year's growth rate (10 percent), making it a better value than Clorox (PEG ratio, 2.3) and Procter & Gamble (2.5). Kimberly Clark's second-quarter earnings came in below Wall Street's estimates because of higher energy costs and start-up expenses for new tissue products, but John Hancock Sovereign Investors manager John Snyder sees a payoff next year when the new stuff starts selling. "This is a global franchise that's going to better weather the storm than most companies in the marketplace," Snyder says. Meantime, it pays a 2 percent dividend.
Drugmakers are a natural choice now because of their steady earnings growth and high margins. Although pharmaceutical stocks have performed well in the weeks since the Sept. 11 attacks, they're not as expensive as you might think. The pharma group's average P/E ratio typically has run 10 percent to 40 percent above the S&P 500's over the past 10 years -- and these days it's smack in the middle of that range, at about 25 percent. MONEY recently recommended Pfizer (PFE: up $0.27 to $42.60, Research, Estimates) as the best large-cap pharma play, and we still think that's the case. Now at about $41, it trades at nearly 26 times next year's earnings, which are expected to grow at least 22 percent.
Another haven is Johnson & Johnson (JNJ: up $0.36 to $58.78, Research, Estimates) , which we called "the ultimate buy-and-hold stock" in our August issue. As we said then, J&J combines the predictability of a consumer-goods business (think Band-Aids) with a pharmaceutical division full of rising stars. One of just eight companies in the U.S. with a triple-A credit rating, J&J has increased earnings an average of 10.5 percent a year for the past century -- yep, that's 100 years. We don't think $55, or about 25 times next year's projected earnings, is too much to pay for that kind of consistency. 
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OTHER SAFE HAVENS
