Michael Sivy Commentary:
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4 stocks for an uncertain market

These stalwarts have increased earnings for 20 years straight and can protect you from a bear.

By Michael Sivy, Money Magazine editor at large

NEW YORK (Money Magazine) -- The older this bull market gets, the more you wonder whether it can last much longer. Certainly the Dow's sudden drop in late February is a reminder that things can change quickly.

The typical bull run lasts for less than three years, and this one passed that mark 18 months ago. That doesn't mean an all out bear market is inevitable soon, but it does mean that you've got to prepare for the possibility that the ride is going to get bumpier, or worse.

A great way to do that is to focus on companies that can keep cranking out increases in their earnings even if the economy slackens. In a really bad market, those kinds of steady stocks are going to hold up better than the shares of less predictable companies.

Four of the stocks in the Sivy 70 have reported higher earnings per share for more than 20 years in a row. That's an impressive record.

But before you buy a stock as portfolio insurance, you want to know whether the company's business model and expansion opportunities will enable it to keep growing - and whether the stock is a decent bargain or already fully valued.

Let's look at our four, in order of least to most attractive now.

Good but not great

Home Depot (Charts) barely managed an earnings gain for the fiscal year that just ended because of the housing slump. And soon after reporting, the company announced that profits would probably decline this year.

I recommended the stock in January at a lower price. And I still like Home Depot, with its 14.5 P/E, as a long-term value investment. Growth should recover to double-digit rates once real estate picks back up. But don't count on booming profits anytime soon - and recognize that if the housing market really tanks, the stock could follow it.

General Electric (Charts) isn't the growth machine it was in the days of CEO Jack Welch. Since Jeff Immelt took over in 2001, reported profits have continued to rise, just not as quickly. Results have also been muddied by lots of retroactive accounting adjustments.

As a result the stock, which I've recommended before, hasn't made much headway. Still, GE is a high-quality company with slightly above average return prospects. And the shares are relatively cheap, trading at less than 16 times estimated earnings for 2007.

The best opportunities

Walgreen (Charts) has a very clear business model and appears to have plenty of room for further expansion. Sales of prescription drugs, accounting for almost two-thirds of total revenue, have continued to rise by more than 9 percent a year at existing stores - and 13 percent when new stores are included. That's quite an achievement considering the increasing competition from rivals like CVS as well as from discounters Wal-Mart and Target, which sell generic drugs for as low as $4 a prescription.

Such growth is possible because overall demand for pharmaceuticals continues to rise. Partly that's thanks to the aging of the baby boom, but the expansion of Medicare drug programs has also helped.

Nonetheless, the key to Walgreen's long-term success is the steady addition of new outlets, which have been increasing more than 7 percent a year. The company's plans call for store growth of 25 percent by 2010. Earnings per share have increased 15 percent a year and seem capable of continuing at that rate.

The stock's P/E is 22, based on earnings for the current year. That isn't cheap, but Walgreen's prospects are worth paying for.

Wal-Mart (Charts), however, looks to me like a greater value, considering that its shares trade at only 15 times this year's estimated earnings. There are reasons for the lower price, of course: The giant discounter isn't riding a demographic wave like Walgreen is. In addition, as Wal-Mart struggles to improve its public image, labor costs may rise because of increased wages or benefits, particularly health insurance coverage.

Historically, though, Wal-Mart has shown that it can accommodate change and prosper. Looking forward, technology could cut costs by helping stores better manage inventory.

Wal-Mart could also shift its product mix to faster-selling, higher-margin items. And international expansion, which accounts for a third of all new stores, should really pay off.

In fact, new stores are the main engine of growth. Overall, they're increasing about 9 percent a year, and earnings per share are projected to grow 13 percent annually.

Wal-Mart has raised its dividend for 32 years in a row, and the shares currently yield 1.4 percent. That means Wal-Mart's return potential from earnings and dividends is only slightly below that of Walgreen, while the P/E is a whole lot cheaper.


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