Is It Time to Pick Up AAA-Rated Stocks?

It seems that everyone has an opinion about the S&P downgrade of America’s debt. Even rapper Snoop Dogg tweeted: “US Economy downgraded #getyomoneyright” (however, I’m really more interested in Lady Gaga’s thoughts).

The fact is that over the past couple decades a triple-A credit rating has become an endangered species. Back in the 1970s there were 58 U.S. companies that had the designation. Now, there are only four.

With aggressive strategies to ramp profits, global competition and risky mergers, it is exceedingly difficult for companies to maintain AAA status. The 2008 financial implosion was also a big factor. Companies like General Electric (NYSE:GE) and Pfizer (NYSE:PFE) fell below AAA.

Could the remaining four be good investments?

Here’s a look:

Automatic Data Processing (NYSE:ADP): The company has a strong payroll business, which is a juicy source of recurring revenue. Yet the unemployment rate remains a big problem, and if the economy falters, it may start to increase again. If so, there will likely be pressure on ADP.

Exxon Mobil (NYSE:XOM): In the latest quarter, the company posted a whopping 60% increase in profit to $8.5 billion. This was not only due to rising oil prices but also improved production. A key has been Exxon’s acquisition of XTO, a top natural gas producer.

Despite all this, investors should be cautious. Over the past week, oil prices have plunged. If the deterioration continues, Exxon’s shares will likely suffer as well.

Microsoft (Nasdaq:MSFT): The company continues to generate huge cash flows from Windows, business software and the Office franchise. While this will continue for some time, there is not much growth.

In addition, Microsoft has failed to capitalize on major market trends, such as cloud computing and mobile. Instead, it’s been its archrival, Apple (Nasdaq:AAPL), that has found ways to benefit. There are few signs that Microsoft has a clear strategy to get back on track.

Johnson & Johnson (NYSE:JNJ): This is the company that looks quite attractive – it’s seeing more momentum in its earnings and is taking actions to deal with problems like product recalls.

J&J expects to launch some mega drugs like Zytiga (just approved), telaprevir, and Xarelto. They should nicely juice the top line.

What’s more, J&J recently purchased Synthes, which develops surgical devices for orthopedic trauma. It’s a high-growth, high-margin business.

Finally, J&J pays a nice dividend of 3.6%, which in light of the company’s AAA rating, is definitely quite safe.

Tom Taulli is the author of various books, including “All About Commodities” and “All About Short Selling.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.


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