Everything’s gone sky-high this past year in the market: chip stocks, speculative small-cap stocks, smokestack stocks, biotech stocks, even beaten-up telecoms. Everything—except quality. In fact, I can’t recall a moment when you could buy blue-chip stocks, classic long-term investment plays, at such dirt-cheap prices. The biggest and the best, in fact, are the only real bargains left in the market after the historic recent run we’ve had. History teaches us that quality is almost never more cheaply bought than junk, so I have to believe that the bizarre disparity between low-quality, speculative, sure-to-flame-out single-digit stocks and high-quality, well-run, well-managed institutions will soon revert to the mean. When it does, there will be huge money made the old-fashioned way, by buying and holding stocks like the following five that the market’s virtually given up on in its endless—and, ultimately, futile—search for the best nanotechnology-powered, cure-for-Alzheimer’s, voice-over-Internet wireless plays.
American International Group: The stock market’s wild about China, willing to buy some of the wackiest companies that country floats, even when the management is communist and the accounting makes Dennis Kozlowski’s legerdemain seem pristine. Yet the cheapest China play, and the one that has actually done business—and made money—there for years is AIG, the wonderful financial and insurance company run by that cagey septuagenarian Maurice “Hank” Greenberg. AIG’s selling at sixteen times earnings in 2004, cheaper than virtually any big-cap stock in this overheated market, in part because of fears that Greenberg can’t live forever. Hmmm, maybe not, but I’ll take a 78-year-old Greenberg over just about any other chief executive in this country. I bet this $70 stock returns to all-time highs in the $100s before he calls it quits. If President Bush landslides the election in November, he’s going to push for privatization of Social Security, and AIG could be among the biggest winners in capturing assets. Get it while it’s . . . well, not hot.
ExxonMobil: While other oil companies are either revising their holdings down (what happened to those 4 billion barrels that Royal Dutch/Shell told us it had in the ground?) or retrenching and trimming back, ExxonMobil just keeps doing everything right. Apparently nobody cares, as it sells for a low seventeen times earnings and yields a bountiful 2.5 percent. But in a world where we are obviously running short of oil and the price of the commodity has been rising ceaselessly, this gem of a company might at last begin to make you money. And when one management team after another has been pilloried for self-enrichment or showboating, the quiet, steady style of XOM CEO Lee Raymond can’t be beat.
General Electric: Go figure. General Electric, the premier industrial and financial company in the world, can now be bought for less than what most stocks are selling for in the S&P 500. G.E.’s done nothing for years, selling for just a tad above where it traded down to after 9/11. (Full disclosure: I am a part-time G.E. employee at CNBC.) Yet CEO Jeffrey Immelt’s been busy reinventing the company, selling and spinning off low-margin, boring divisions and accumulating high-growth enterprises in entertainment (Universal) and health care (Amersham, a British diagnostics company). In the meantime, G.E.’s become a dominant leasing company in what was once a fractured industry and has two divisions, aircraft and energy, that will finally begin to show year-over-year gains in the second half. Don’t forget plastics, which also shows signs of turning. Buy it and put it away. For those of you who like CBS instead of NBC, the exact same thing could be said about Viacom, another fabulous company with a stock that albeit rich, is cheaper than a lot of the loved junk out there.
Microsoft: Last week, I found myself interviewing Rick Sherlund, the Microsoft “ax” on Wall Street, Goldman Sachs’s software analyst, and we were both marveling that Microsoft has, for the first time in our memory, become a cheap stock. At 23 times earnings, you are buying a company with double-digit growth and a balance sheet with more cash—$53 billion—than any corporation, and most governments, in the world. Steve Ballmer, the CEO, and John Connors, the CFO, talk a cautious, honest game—maybe too cautious, as they have scared off most investors with their negative prognostications for years. They’ll never get nailed for hyping or touting, but they’ve been murdering the stock with their caveats. Take advantage of Mister Softee selling at a huge discount to where it used to sell, even though it is a much better company these days, with great leverage to cash in on the return of corporate spending.
Pfizer: You can always tell frustration on the radio, and the number of callers to my WOR 710 nighttime program who want to give up on Pfizer tells me that at last, this, the best pharmaceutical company in the world, is about ready to rumble. Pfizer sat out the entire bull market over the past year as the market fretted about government regulation of health care. Silly market. A shrewd read of the Medicare legislation just passed shows that Pfizer could be among the biggest beneficiaries, getting the government to pay its high prices for all of its most expensive medicines. CEO Hank McKinnell may not be a firecracker—I did once see him crack a joke about two years ago on TV—but he’s got his company set to make fortunes when the Feds start spending that new $400 billion on the older folks. Added benefit: a huge play on the Bush team’s endless dollar-bashing, as Pfizer sells tons of drugs overseas.
Who would have thought that a portfolio made up of AIG, Exxon, General Electric, Microsoft, and Pfizer would ever be so out of fashion that those stocks could be purchased so much more cheaply on an earnings basis than Time Warner or Tyco or Lucent or Nortel or so many other ne’er-do-well enterprises of the past few years? Who would believe that after all the scandals we have seen, quality would be the market’s black sheep?
To me, it’s the ultimate anomaly in a business where anomalies always make you money. That means it’s time to ring the register on speculation and time to load up on these out-of-favor great American companies.