Win In Today's Market - Statistical Data Included

Kiplinger's Personal Finance Magazine, April, 2001 by Steven Goldberg

COVER | Let it rain! These STOCKS will keep you from getting soaked.

JUST OUTSIDE San Antonio is a vast hole in the ground. Bordered by roads and railroad tracks, it covers 844 acres, and it isn't pretty. Trucks and trains carry an average of 30,000 tons of gravel and related material out of the quarry every day, to be used for roadbeds and the foundations of commercial buildings, houses, prisons and schools. This is about as far from the new economy as you can get.

Technology is sexy. Rocks are not. But in investing, now may be the time to consider rocks and other low-tech investments. At Martin Marietta Materials, the nation's second-largest gravel company, revenues and profits are growing quickly because of acquisitions and a federally funded acceleration in highway and airport construction that will continue regardless of what the economy does.

Whether the technology-stock boom of 1999 was "the greatest financial mania in American history," as James Gipson, co-manager of Clipper fund, calls it, remains to be seen (see "Yes, There Is a Sanity Clause," on page 44). In fact, as 2001 got well under way, the stock market sent mixed signals--stocks of both the old and new economies were running neck and neck but going nowhere in particular. This is the classic Wall Street quandary, and your best offense in the face of the market's indecision is the simplest in the investor's playbook: broad, deliberate diversification that puts you in all sectors of the economy.

Should you still own leading technology stocks? Yes, not despite their weak prices but because of them. This is classic contrarian investing, like buying suntan lotion when the rain pours. We suggest three such stocks on page 39. But why pig out on technology stocks when you can also buy shares of first-class companies in other sectors for very low prices?

The reason that diversification serves you best right now is that the stock market lacks clear direction. Will technology keep getting soaked, or come in out of the rain? And what about the energy, financial, health care and utility stocks that had their day in the sun last year? Nobody knows how this storm will end, but wherever the sun shines, you'll be there.

Toward that end, we've identified 13 companies with decent growth rates--or the potential for a pickup in growth. Most trade at (dare we say it?) rock-bottom prices, and the others are valued within the realm of reason. Collectively, their feet are planted in the vital corners of the economy.

Gritty business

A 1990s SPINOFF, Martin Marietta Materials digs into the earth to extract rocks and then crush them into everything from sand to fist-size gravel. Headquartered in Raleigh, N.C., the firm owns quarries in 27 states, the Bahamas and Canada. The main cost of gravel (generally borne by the buyer) is carting it to building sites. So the key to this business, says controller Anne Lloyd, is location, location, location.

Large firms with many quarries, such as Martin Marietta Materials (MLM), are gaining market share, largely by buying up smaller, less efficient rivals. The company's revenues have more than doubled over the past seven years--"not bad for a rock company," says John Kasprzak, an analyst at BB&T Capital Markets.

It's an expensive business to get into, and it's getting more expensive because of environmental restrictions. With fewer competitors, the firm has been able to raise prices about 4% annually to meet increasing demand.

Half of the company's business comes from highway construction, and the federal government will boost highway funding by 44% through 2003. "We think the next three years are going to be the sweet spot for highway construction," Kasprzak says. Longer term, increased commercial and residential construction should boost profits, which he expects to rise about 12% to 15% annually. The stock trades at 16 times consensus 2001 earnings estimates. (Unless otherwise noted, analysts' earnings estimates are courtesy of First Call/ Thompson Financial.)

Stocks on the move

BRAZILIAN-BASED Embraer looks to the skies, not the ground, as the largest maker of medium-haul passenger jets. What's compelling about Embraer is that its regional jets are in increasing demand by major airlines for flights to their hubs. "It's very expensive to run larger aircraft, and people don't like flying turboprops," says Michael Prober, co-manager of CRM Mid Cap Value fund.

A company like Boeing can't compete with Embraer's low cost structure. The average worker who assembles Embraer's planes earns just $8,000 to $9,000 annually. As a result, the firm has back orders for 623 jets, says Byron Callan, a Merrill Lynch analyst.

Despite its location in Brazil, 95% of Embraer's sales and more than half its costs are in U.S. dollars. That minimizes the risk to investors of currency fluctuation. "If this company were located in Fort Lauderdale, its price-earnings ratio would double," says Prober. Embraer's American depositary receipts trade at just 12 times 2001 earnings estimates.