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10 rock-solid stocks
The economy is strong, but perils abound. We find 10 sturdy stocks to see you through a tricky year.
December 28, 2005: 3:57 PM EST
By Jon Birger and David Stires, FORTUNE
FORTUNE Investor's guide
Building weath in 2006 will require savvy choices and an eye for safety. Here are FORTUNE's best investment ideas.
10 rock-solid stocks
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The best bond deals
6 international all-star stocks
Why Google will falter in 2006

NEW YORK (FORTUNE Magazine) - The once-dark mood on Wall Street has brightened considerably. And, no, we're not just talking about the investment bankers dreaming up ways to spend their seven-figure bonuses.

With oil prices falling, corporate earnings still growing, and consumer confidence on the mend, the stock market has awakened from its 10-month slumber.

And the investment world's best and brightest say that's just the beginning. In a recent letter to investors, Legg Mason fund manager Bill Miller ticked off the positives:

"The economy is strong, balance sheets are as liquid as they have ever been, profit margins and return on equity are hovering near all-time highs, earnings are growing double-digit, companies are buying back stock in record amounts, mergers and acquisitions are happening at nice premiums to prevailing prices."

To Miller, the conclusion is obvious: "I think the market is going up."

Even the hurricane season from hell doesn't seem to have knocked the economy off stride. Gross domestic product grew at a consensus-thumping 4.3 percent clip in the third quarter.

Consumer spending rose 4.2 percent, while business spending on equipment and software rose at a brisk 10.8 percent pace.

Corporate earnings, meanwhile, are increasing 11 percent annually, which in turn has reduced the price/earnings ratio of the S&P to its lowest levels since 1996. Says Yale University finance professor Roger Ibbotson: "The main reason to be optimistic is that P/E levels have dropped."

Some worries

Yet there are plenty of reasons to be pessimistic as well.

The economic landscape includes an energy shock, a cooling housing market, rising inflation, and Federal Reserve rate hikes. All of these are classic warning signs or symptoms of an economic slowdown.

Rising interest rates, for example, are a big drag on consumer spending. Higher rates mean heftier credit card bills and far fewer opportunities for cash-out mortgage refinancings.

Just as ominous as the overall rise in interest rates is the relationship between long- and short-term bond yields. We're now on the cusp of something known as an inverted yield curve -- a phenomenon that occurs when short-term rates (now 4.3 percent on one-year Treasury bills) exceed long-term ones (4.5 percent for 10-year Treasuries).

Inverted yield curves predict recessions with frightening accuracy. According to a New York Federal Reserve study, every time the U.S. has had a period of inverted yield curves, recession followed within a year.

The danger signals are so unmistakable that J.P. Morgan Chase market strategist Abhijit Chakrabortti believes Wall Street's bulls are in denial. "I'm thinking of calling my year-end report 'Eyes Wide Shut,' " he says.

Confused? Given the mixed signals, that's understandable. It's also why the stocks we're recommending for 2006 don't depend on a rousing economy or a rising-tide stock market. After reviewing the latest research and interviewing dozens of analysts and money managers, we trained our sights on 10 moderate-P/E stocks positioned to benefit from secular -- not cyclical -- trends.

If tech stocks take off, our picks may not keep pace. But in a rocky market, they should provide a margin of safety. See the 10 in the table below. Click on company names for more of FORTUNE's analysis.

To read the complete story, go to Fortune.com.  Top of page

10 companies with staying power
These stocks are the kind of strong, steady performers that can hold their own in all kinds of weather. Click on company name for FORTUNE analysis.
Company Price 52-wk
high
52-wk
low
P/E
(TTM)
Why we like it
Altria Group (MO) $21.04 $21.20 $16.06 10.3 Easing litigation pressure and rich yield make it a buy.
Archer Daniels Midland (ADM) $28.40 $33.00 $23.13 9.3 Ethanol has turned agri-giant into an 'energy growth story.'
Berkshire Hathaway (BRKB) $80.32 $83.57 $54.66 N/A PUHCA repeal means it's easier for Buffett to invest in energy.
Citigroup (C) $4.61 $5.43 $2.55 12.8 Financial behemoth selling at an attractive price.
Eli Lilly (LLY) $36.53 $38.00 $31.98 7.7 Drug giant has best growth prospects in the industry.
Hewlett-Packard (HPQ) $53.93 $54.00 $33.40 11.1 CEO Mark Hurd is cutting billions in costs.
Norfolk Southern (NSC) $58.64 $58.62 $33.96 14.4 Beating CSX in service and profiting from surging coal demand.
Washington Mutual (WM) $34.73 $35.04 $26.01 14.6 The nation's biggest thrift yields more than a Treasury bond.
Prices as of: Apr 13 10:00
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