Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on
Learning my trade as a newsman in Southern California in the 1980s, I covered so many brush fires that I'm still trying to get the smell of smoked chaparral out of my clothes. The blazes that swept out of the wilderness to attack developments in Pasadena, Malibu and Laguna Beach all had one amazing constant: They rarely burned down a whole block. One or two houses were always left standing, virtually undamaged, as if protected by a divine hand to lead the recovery.
During market conflagrations such as the one that consumed Wall Street last week, there are likewise always several stocks left standing -- although they are hard to see at the time amid the smoldering ruins. Yet you need to train yourself to look, because those tend to be the companies that become market leaders when investors regain their appetite for buying, as they always do.
Back in 2000, as an example, value stocks that had been ignored for years rubbed sleep out of their eyes and jumped higher the minute technology stocks began to crash. Classic case: From March 10, the day of the
top that year, to the start of 2002, brewer
rose 65%, while tech favorite
lost 75%. If not an act of providence, it was at least a fast shift in the way investors decided to value companies.
Today we see the same forces at work, and strangely enough, another brewer,
Molson Coors Brewing
, has led the charge of the underappreciated.
Let's take a few minutes today to study this phenomenon and size up the prospects of a handful of interesting companies that stood tall during the recent unpleasantness. My research suggests that you're going to need some durable heroes in the next few months, because despite the big rally on Tuesday, the first three quarters of this year could be a real seesaw battle of wills between bulls and bears before optimists ultimately triumph in the late fall.
In that kind of environment, you're really going to need a stiff drink. And that's where Molson Coors comes in. Its shares have the distinction of surviving panics both last week and last summer without a scratch. Based in Denver, the world's fifth-largest brewer has a very simple game plan: It makes two of North America's most popular beers, Molson and Coors, as well as a few specialty products, in 11 breweries worldwide. Last year it earned $374 million on $5.8 billion in revenue.
The big story at Molson Coors is not the product, which provides a great value for the money, but the finances. The merger two years ago between two pioneering U.S. and Canadian families has created tremendous synergies that are saving buckets of money -- at least $175 million in the next round, to be exact.
The company's new managers have a genius for leveraging a much smaller marketing budget than peers such as Budweiser and Miller to promote their products in similar but distinctive ways in each home country. Sales volumes are growing at an above-industry pace, and margins are fattening. Trading now around $86, Molson Coors could trade at 16 times my estimate of 2008 earnings by the end of this year, or $100.
Stock of Steel
has been another pillar of strength in the past week. The world's largest steel maker has benefited from a brilliant decision to become self-sufficient in iron ore. As it has taken steel mills out of production to combat the industry's notorious cyclicality and surpluses, steel prices have risen, and it has taken great advantage.
Arcelor Mittal is now moving production to low-cost plants in countries such as Ukraine, South Africa and Kazakhstan. Ultimately it plans to add 10 million tonnes (metric tons) of production capacity in these areas, helping to expand profit margins. The bottom line is that long-expected benefits of steel industry consolidation are coming to fruition and still have a ways to go. Now trading at $50, I think Arcelor Mittal can get to $65 over the rest of the year.
Energy master limited partnerships (MLPs) also survived the past week and last summer, as if they were skating on thick ice. One of my favorites is
( CPNO), which is a pure play on natural gas transportation. Earnings are growing 50% on an annualized basis because of some clever acquisitions in the midcontinent and Gulf Coast areas, as well as a boost in operations at its gas processing centers in Texas, which are essentially refineries.
In an MLP, the key metric to follow is something called distributable cash flow per unit. It's up around 15% over the past year, which is off the charts for an industry that is normally expected to grow very slowly. Copano's edge is that it does an unusually efficient job of marketing and processing natural gas; this shows that innovation can be useful even in a commodities business. Shares are trading at $65 now, and my target for the next 12 months is $80. Add a 5% dividend yield, and you've got the potential for a 25% total return in a difficult period.
These three companies have weathered a tough market and deserve respect as a safe refuge. I will track them over the next year and report back.
At the time of publication, Jon Markman did not own or control shares of companies mentioned in this article.
Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
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