Morningstar Advisor - February/March 2009 - (Page 38) Spotlight Five Areas to Find Opportunities These sectors got pounded for reasons more technical than fundamental. Sector Dislocation Investment-Grade Corporate Bonds r Banking, brokerage, and finance company debt, which makes up more about 30% of the corporate-bond market, swooned from September through November, led down by brokerage bonds, which fell by nearly 30%. r The rest of the corporate-bond sector took a hit when it became clear that the broader business community was quickly losing access to liquid lending markets. r The corporate component of the Barclays Capital Aggregate Bond Index fell a stunning 11% last year through November, before recovering slightly in December. Financials were down 8% in 2008. Industrial Stocks r Not only is demand falling given the deteriorating global economy, but the U.S. dollar has rallied as well, pressuring earnings that U.S.-based firms derive from overseas. r The worst is far from over for industrials stocks; 2009 will be a rocky year. Fundamental Opportunity r Yields on investment-grade corporate bonds have been pushed as high as 8% to 9%— an additional 5 to 6 percentage points over comparable maturity Treasuries. r Analysts estimate that prices on these corporate bonds reflect default rates spiking to levels not seen since the Great Depression, a view many think is overly pessimistic. r Top bond managers are buying the debt of large money-center banks, brokers, and large insurers, as a robust government intervention has helped shore up the prospects of these firms’ debt. r T. Rowe Price Corporate Income PRPIX: David Tiberii likes the debt of large banks and (former) brokers, arguing that such firms’ bonds are better bets over the next several years than their common stock. r Dodge & Cox Income DODIX: This fund offers corporate exposure in a tame, diversified package. r Vanguard Long-Term Investment-Grade VWESX: Subadvisor Wellington Management boasts a deep credit research team. Low fees are another plus. r Valuations are very attractive for the longterm investor. r A host of wide- and narrow-moat firms are down 40% and 50% the past year and are yielding 4% and higher. Ways to Play r General Electric GE: The firm may lose its AAA credit rating and faces a tough couple of years in both its finance and industrial units, but the stock trades for less than one times sales. r 3M MMM: The company expects a 7% drop in volume in 2009, but with the stock in the mid-$50s—versus our fair value estimate of $85—and yielding 3.5%, investors are getting a great company at a cheap price. 38 Morningstar Advisor February/March 2009
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