Irony to the Rescue?

by Richard Band | September 14, 2011 4:00 am

#2 TARP[1]Now, here’s a role reversal. Stocks roared back in the last hour of trading Monday and continued their rally Tuesday — on rumors that China and perhaps also the other members of the BRICs quartet (Brazil, Russia and India) might purchase a huge quantity of troubled euro zone sovereign debt.

For anybody with the slightest sense of history, it’s hard not to smile. Back in the fall of 1998, the financial world was flailing in a funk because Russia had just defaulted on its debts. Korea, Indonesia, Thailand and other emerging Asian economies were fighting to stave off collapse.

Now we’re told the emerging countries might be preparing to bail out the likes of Greece, Portugal and Ireland — possibly Italy and Spain, too!

Will it happen? I wouldn’t be surprised if the BRICs — led by China, which of course boasts the largest war chest of foreign currency — announced, within the next few days, some kind of commitment to buy European government bonds.

However, the amount of the purchases will be crucial. To reverse investors’ panicky mind-set, China and its allies will need to launch a shock-and-awe strike. I’m talking about something on the order of $500 billion or more.

Anything less might lift global stock markets for, say, a month or two. But then the old problems would fester again. The bear would return.

So I’m on the edge of my chair. We’re about to see history written — in either very big letters or a tiny footnote.

With such extreme outcomes possible, I advise you to hope for the best, but not to bet your bottom dollar on it. Maintain a well-balanced portfolio.

Be very selective with new stock purchases, and buy only on broad market weakness (not on strong up days like Tuesday).

Among my portfolio picks, Unilever (NYSE:UL[2]) looks attractive. All year, the Anglo-Dutch food-and-soaps maker has reported good earnings. Indeed, Wall Street is looking for UL to finish 2011 with a 21% profit gain.

Until recently, the stock — reflecting those healthy fundamentals — has refused to go down. But now, in September, the pan-European selling spree has finally reached even the safest names.

So it’s time to step up and buy. UL throws off a juicy 4.1% yield (quarterly dividends), and there’s no British withholding tax, so you can tuck the stock into your IRA if you want. Pay up to $32.

The news is less happy at Tata Motors (NYSE:TTM[3]). On Friday, the Indian car company’s CEO, Carl-Peter Forster, stepped down after less than two years in office.

This isn’t a fatal blow (Forster isn’t Steve Jobs), but it comes at a difficult moment for Tata. Car sales in India fell 10% during August, another sign of decelerating growth for the Indian economy in general.

Within the next few quarters, I’m confident TTM will be firing on all cylinders again. However, we need to be patient. Cyclical businesses do fluctuate more than consumer staples. That’s the price of greater capital-gains potential.

I’m keeping my buy limit on TTM at $20. At Tuesday night’s closing price, the shares were fetching only five times estimated earnings for the current fiscal year (ends March 31). How many stocks do you know of with a P/E in the mid-single digits?

From here, I project a total return of 40% to 60% in the next 12 months.

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