The economy's coming back -- it's just the wrong part of the economy. Clorox and Procter & Gamble are reporting booming numbers, sharply higher than thought possible even a few years ago. Coca-Cola's making a terrific comeback. Newell Rubbermaid just announced a fantastic quarter, and its elusive turnaround is at last in place. Avon Products and Colgate seem to have their groove back, in part because the dollar is at last falling. Philip Morris is about to boost its dividend and is seeing big numbers in foreign sales; it just jettisoned loser Miller Brewing for $5 billion. United Health Group, the largest health-services company, blew away the numbers and upped its stock buyback; and even Aetna, the giant health-maintenance organization, has returned to profitability after staggering losses. The hospital companies, Tenet and HCA, are on fire and close to new highs, as hospital rates at last are climbing.
Yet the market as a whole goes lower and keeps going lower, and people are getting gloomier and gloomier about its prospects. What gives? Quite simply, people own the wrong stocks. They are wrongly positioned for a cyclical recovery based on strong capital spending -- that's the big-ticket stuff that corporations buy -- when the real strength is in household products that consumers buy.
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Individual investors and the mutual funds are stuck owning the Ciscos and the Intels, the Applied Materials and the KLA-Tencors, still expecting a recovery in capital spending that needs more semiconductors and more data routers. They still own the Microsofts and the Dells, where, if anything, business is getting weaker, not stronger. They own the companies that manufacture state-of-the-art equipment, as they were taught to buy, not the companies that make bleach or perfume or tobacco.
And who can blame them? For the longest time, if you bought what was most exciting, you made the most money. High-speed phone lines? Try Covad or Rhythms Net Connections. Video games? How about Take 2 Interactive or Activision? Phones that allow you to photograph your kids, buy a beverage, and watch movie clips? Why not stock up on Nokia, Motorola, Vivendi, or America Online?
But now these companies are all struggling, and if you own the stocks of companies that make these products, you're getting killed, just slaughtered. Take one of the most "investable" themes of the past few years: the color-TV-ization of your personal computer. Few companies could benefit more than Nvidia, which made the high-speed color-graphics chips that gave your personal computer the look and feel of a television. Last week, Nvidia announced a dramatic slowdown in orders. Companies that make the phone equipment of tomorrow can't buy any orders for their wares. Things are getting worse for them, not better, as phone companies either default on their bills, à la WorldCom, or rein in capital spending, as SBC, BellSouth, and Verizon acknowledge doing. It is a badge of honor for these firms to brag about how they have cut back more than anyone else on spending. In Verizon's case, the cutback may be the only way to ensure that Verizon's bountiful dividend gets met if revenues keep falling. Who cares, anyway? If no one else offers more state-of-the-art equipment, why should SBC or Bell South?
In short, the growth industries, the ones that kept the expansion alive for so long, are in retrenchment mode, with less spending by financial, telecommunications, and technology firms themselves, which amounts to 80 percent of all technology spending. Do you expect the spending in cable, for example, to jump anytime soon? Those companies, once primary growers, are now fighting for their lives!
Meanwhile, Procter & Gamble announces earnings that far exceed expectations, and people just yawn. They don't want to be bored with consistent earnings; they want to be wowed with dramatic growth, something that Procter & Gamble can never attain for them again. As Procter goes, so go the Cloroxes and the Philip Morrises.
So what's an investor to do? You have to forget about the past and invest in the future: water, tobacco, bleach, and soda. Consider four companies that give you good dividends, allow you to sleep at night, and believe in putting their money where their mouths are: Philadelphia Suburban -- that's right, the main water company for the Middle Atlantic states; Clorox, which just boosted its dividend and announced a bountiful buyback; Philip Morris, which is on the verge of boosting its dividend, and it already yields 5 percent; and Pepsi, which has suffered a major tumble and is buying back stock hand over fist. All of these work as an alternative to cash, which yields next to nothing and has no upside.
And what about the Intels, Microsofts, Ciscos, and Dells, let alone the Nortels, Lucents, Motorolas, Sun Micros, and EMCs? These stocks are losers. Why is that so hard for people to understand? They offer no dividend protection at a time when cash yields almost nothing, none of them sees growth picking up in the second half of the year, and they are dead money at best. Yes, I know that Cisco and Microsoft have a huge amount of cash. But unless they want to return it to the shareholders in some form of dividend, who cares? If they plow more money back into their "mature" businesses, what assurance is there that they will generate a good return on that capital?
Many people hold on to these stocks because they don't want to take a loss. Still others hold on, at least to the Nortels and Lucents, because with stocks that have already fallen this low -- Nortel is less than a dollar -- they figure the risks of further significant downside are minimal. This is nuts. If I offered to reverse-split these stocks one for ten, giving you one share of Lucent for every ten you own, say, with a price of ten instead of a dollar, you'd sell it so fast your head would spin. There's always a downside! So trade up now.
It would be one thing if the trade I'm talking about put you into more dead money, but it doesn't. It is putting you in the one area of the economy that is rocking: the consumer nondurable segment, which had been a poor performer for many, many years.
That's why upgrading now makes so much sense, and staying with the old excitement will produce terrible returns over the short, the intermediate, and, yes, possibly even the long term.
That's an awful bargain to make just because you think that one day, years from now, you just might, but probably won't, get your money back in technology.