8 investment ideas for '08
1. Growth is good.
Up until 2007, profit growth was strong throughout the entire stock market, giving investors little reason to "pay up" for growth stocks, says Federated's Linda Duessel. That powered a five-year rally for so-called value stocks led by financial and energy stocks. But with profit growth turning negative in '07 for the first time since '02 and more weakness expected in '08, it makes sense to pay a premium for stocks that can deliver steady growth in tough times, she says. "We are not betting on a recession, so we are betting on continued good news in the growth area. We are nine months into the growth run, and the average run lasts 30 months."
2. Think big.
After getting walloped by small stocks since the late-'90s bust, the biggest stocks on the planet are reasserting themselves as market leaders, says Merrill's Richard Bernstein. "We have been big fans of large-cap growth," he says, "and think it is going to work again in '08." He offers three reasons: In periods of high volatility, they tend to top the performance charts thanks to their earnings stability; they have big foreign exposure; and they are high-quality names, which tend to attract buyers in turbulent times.
3. Target tech.
Tech firms don't rely much on banks for financing. The transition to an Internet-centric world dominated increasingly by gadget lovers and gamers makes fast-growing tech - especially big techs - a buy, says Alger's Dan Chung.
4. Buy unloved stocks.
Companies that sell consumers discretionary goods they don't really need have been beaten down 30 percent to 70 percent, says Chung. "We are going to stick our necks out a little on this group. It's a large sector to do some fruitful stock-picking." Similarly, banks and brokerages hit hard by the credit crunch are due for a bounce in '08, says Citigroup's Tobias Levkovich. "There is opportunity," he says. "These stocks have just gotten ripped." The mix of attractive valuations, pessimistic investor sentiment and poor performance this year suggest these laggards are poised for better performance, Levkovich says.
5. Exit emerging markets.
After five big years of gains, it might be prudent to pare back exposure in white-hot stocks in developing markets, which could cool because of the ongoing credit crunch. "Rebalancing is the step so often forgotten by investors and is so important," says Schwab's Liz Ann Sonders. "You may not have the bragging rights to say, "I sold ... right at the top,' but why in the world, if you established a 5 percent position that is now 15 percent of your portfolio, wouldn't you pare it back?"
6. Go abroad.
Shield your portfolio from the weakening U.S. consumer and take advantage of global growth by buying stocks in developed foreign markets, says Bernstein. You can also gain foreign exposure, he says, by owning large export-oriented U.S. companies. The weak U.S. dollar also boosts earnings of U.S. multinationals.
7. Play defense.
With volatility on the rise and risky assets perhaps facing more downside, rotate into safer investments, says Bernstein: "Things like higher-quality bonds, larger-cap stocks in the U.S. and developed markets abroad." The old aggressive leaders, such as small-cap stocks and higher-risk plays, are likely to fall out of favor.
8. Cash is king.
"Credit was king for many years," says Chung. "Now, cash is king. We are looking very carefully for companies that can generate free cash flow." They can grow their business without having to go to the bank. "Going to the bank has gotten a lot harder," he says. Companies that generate free cash flow tend to be growth companies.
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