Where To Invest 2010: Plodding Along

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EDITOR’S NOTE: SmartMoney based its annual look at where to invest this year on three possible scenarios for the U.S. economy. Last week, SmartMoney discussed the best stocks to invest in if the recession returns in 2010. This week, SmartMoney looks at stock picks for investors anticipating a slow, but steady, year.

The Premise: Sure, the economy picked up steam this past fall. But much of that growth is tied to the trillions of dollars the U.S. government threw at the financial crisis. The government starts taking away some of that stimulus in 2010, and many analysts contend that the U.S. economy will enter a “new normal” phase of tepid growth. The best stocks in this environment, according to some experts, are those that are expanding their business beyond U.S borders or companies that do particularly well in sluggish times.

Strayer Education (STRA)

Classrooms are filled these days with adults trying to gain an edge in this tough labor market. That’s good news at for-profit education firm Strayer, based in Arlington, Va., which has generated double-digit sales increases at a time when many companies struggle to eke out growth.

But Strayer chief executive Robert Silberman downplays the impact of the downturn. “Our rate of enrollment has been just as high in past expansions,” he says, attributing the growth in part to the shift from a manufacturing-based economy to a knowledge-based one.
The for-profit education industry has had its trouble with government regulators over enrollment practices, but that’s a much bigger problem for Strayer’s rivals, says Oppenheimer analyst Scott Schneeberger.

The company’s management gets high marks from analysts for delivering consistent earnings and a disciplined growth strategy. While Strayer is trading below its five-year P/E range, it’s still not cheap. But Karl Brewer, co-manager of the William Blair Small Cap Growth Fund, says it is worth paying slightly more for the best-managed firm – or the straight-A student.

Chevron (CVX)

While oil prices rose in 2009, shares of big energy firms like Chevron have lagged. That’s one reason analysts are upbeat about the company’s future. Eventually, the higher prices should help Chevron’s profits.
Some of that excitement is also due to Chevron’s prospects for production growth. About a decade ago it stepped up its international exploration efforts – in projects from Nigeria to the Gulf of Mexico. That’s beginning to pay off, with about 64 billion barrels of oil-equivalent reserves, more than five times its current proven reserves.

It has been better than the other big oil firms at replacing its reserves in the past five to six years, says Chris Armbruster, senior research analyst at Al Frank Asset Management, which owns the stock.
The San Ramon, Calif.-based firm has also doubled its proven natural gas reserves from a decade ago. For investors like Timothy Guinness, co-manager of the Guinness Atkinson Global Energy Fund, that’s a plus: “It’s an extremely good place to park yourself, even in a subpar economic-growth recovery.”

Hewlett-Packard (HPQ)

Hewlett-Packard, by revenue the world’s largest technology company, has increasing international sales and a strong balance sheet with a ton of cash. “It’s clicking on all cylinders,” says Uri Landesman, head of global growth investing at ING Investment Management.

All of the company’s businesses – ranging from outsourcing and data-center services to storage and printers – have been taking market share from rivals. The Palo Alto, Calif.-based firm also stands to benefit if early indications of a recovery in corporate-technology spending pan out and more companies replace software, computers and servers. It’s one reason many analysts think Hewlett-Packard’s forecast this past fall for 3 to 4 percent sales growth in fiscal 2010 is too conservative, even if the economy doesn’t recover.

Another economic downturn would not spare Hewlett-Packard. But its hefty $14 billion cash war chest should help it weather the storm. The stock is still cheaper, on a valuation basis, than the broader market, as well as other large technology firms. “It’s a very safe play,” says Bill Kreher, senior technology analyst at Edward Jones.

ChangYou.com (CYOU)

Escapism can be lucrative. Just ask anyone who bought shares of Chinese online fantasy-game developer ChangYou.com at its U.S. stock debut last April. It promptly doubled, and analysts see the potential for further gains at a company now valued at $1.7 billion.

A spin-off from Internet giant Sohu.com, ChangYou developed a fantasy martial-arts game called “Tian Long Ba Bu.” Although games are free, ChangYou sells virtual items like skills and gems, as well as special expansion packs that include maps and more levels, creating a lucrative business that has helped the company generate $6 a share in cash over the past four quarters. Analysts expect new games in 2010 that will help diversify the company’s sales and profits.

The stock, like many smaller Chinese stocks, is quite volatile. But after subtracting the value of its cash horde, ChangYou trades at about eight times expected 2010 earnings. That’s an attractive valuation for a company increasing its profits at a 15 percent annual clip, says Jeff Papp, senior research analyst at Oberweis Funds.

2010 Copyright The New York Times Syndicate