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It’s Dicey Out There — Focus on Blue-Chips and Energy

By Richard Band
Profitable Investing

Third-quarter earnings season still has several more weeks to run, but the major trend is already apparent. Growth has slowed dramatically, for both sales and profits, over the past year. Yet the S&P 500 has climbed 12% year to date.

This is a dicey situation. The Federal Reserve’s money pumping seems to be having less and less of a stimulative effect on the real economy. If corporate profits fall in 2013, today’s stock prices will look to have been too high by perhaps 15%-25%.

One potential positive surprise: Next week’s election results could give us enough of a realignment in Washington to push the federal government a few steps closer toward tackling its long-term fiscal woes. A break in the fiscal logjam would lift business and investor confidence. The stock market would likely resume its climb, despite the cloudy earnings outlook.

Balancing the pluses and minuses, I recommend a cautious approach to stock-picking right now. Concentrate most of your new money on world-class franchises that have demonstrated the ability to prosper even in a slow economy, such as Coca-Cola (NYSE: KO) and McDonald’s (NYSE: MCD).

I’m also nibbling at a few energy stocks; I believe the dip in oil prices since mid-September has largely run its course. My favorite name at the moment is Occidental Petroleum (NYSE: OXY). It yields 2.7%, with plenty of cash flow to support another fat dividend hike soon. Buy below $90.

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