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5 Stocks for a Slow Economic Recovery

Stocks in this article: TEVACSCOHPQGECL

BOSTON ( TheStreet) -- Cisco Systems (CSCO), General Electric (GE) and Hewlett-Packard (HPQ) are poised to outperform if the U.S. economy continues to grow at a weak pace, says Jim Meyer, chief investment officer of Tower Bridge Advisors.

U.S. companies with consistently high free cash flow, earnings growth that outpaces the economy and substantial international sales are Meyer's three main criteria. West Conshohocken, Pa.-based Tower Bridge Advisors, which has $850 million in assets under management, manages accounts based on that trading strategy.

The benefits of free cash flow, namely potentially higher dividends and stock buybacks, will account for a larger chunk of investor returns if the U.S. economy grows at a slower pace, which economists expect. As a result, investors will be lured by companies that tap into growth outside the U.S., particularly in emerging markets.

James Meyer
Jim Meyer, chief investment officer of Tower Bridge Advisors.

"As a company's growth rate slows and it spends less money, cash flow really spikes," Meyer says. "Historically, we've been moving away from dividends and stock repurchases. But as the economics change and cash builds, it makes very little sense to keep it."

Meyer says there's close to $2 trillion on corporate balance sheets "making nothing," particularly with bond yields near record lows.

The solution, Meyer says, is that companies will begin to aggressively buy back stock or increase dividend payments. "Dividends look especially attractive today in a world where competing interest rates are so low. You have many blue chip stocks with dividend yields that exceed their 10-year bond yields, which is pretty perverse."

Investing in companies with high free cash flow isn't a sure thing. That's why Meyer looks at companies that can grow at twice the rate of gross domestic product, or GDP. For him, a growth company can propel earnings by at least 10%.

International investing is important, Meyer says, especially as about 30% of the world's population lives in only two countries, China and India. The U.S. economy may post growth of about 2% to 2.5%, less than the historical average of 3.5% to 4.5%, he notes. International growth probably will be almost double that, he says, citing International Monetary figures.

Still, U.S. stocks have recorded outsized gains this month, with the Dow rising 8.2% and the S&P 500 climbing 9.1%, in line with one of the hottest emerging markets, Brazil, whose Bovespa Index has increased 9.6%. If U.S. shares extend those gains, "you'd want the highest beta stocks you could buy," says Meyer, referring to stocks that closely track indices.

The likelihood that the U.S. indices could continue this breakneck pace of gains is slim, Meyer asserts. When the slow-growth fears creep in again, seeking out stocks with cash flow, earnings growth and international exposure will serve investors well, he says.

Meyer says the following five stocks owned by accounts managed by Tower Bridge Advisors meet his criteria.

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