Please give to The Capital Times Kids Fund.

Ray Unger: Holiday stock market gift bargains abound

Ray Unger  —  12/21/2007 10:02 am

Is St. Nick giving us an opportunity to buy some great, but cheap "stocking" stuffers this Christmas? The S&P 500 has taken a 7 percent whacking since the highs of early October as traders have pretty much banked on a recession for 2008.

As of now, it probably doesn't matter if the GDP does flatten out for six months, the classic definition of a recession. The tsunami that overwhelmed the stock market has already happened.

Despite the recent collapse, the Dow Jones Industrial Average is still up 6.1 percent year-to-date, but the broader S&P 500 is up only 2.1 percent. The smaller cap Russell 2000, however, is now down 3.6 percent. All were much higher a short time ago.

So what's changed? The recession. But has St. Nick now given us an investment opportunity?

First, let's look at what happens to stocks during recessions. You might not believe this, but according to Strategas, a New York-based think tank on the stock market and economy, "by the time a recession has actually been declared, the Fed has already started to ease aggressively, allowing the market to discount the inevitable rebound in economic activity." In layman terms, that means the market goes up during recessions. So bring on the recession!

In Strategas' Dec. 19 report it listed the dates of the past three recessions. Keep in mind these are the months when the nation's GDP was falling. They March 2001 through November 2001; July 1990 through March 1991; and July 1981 through November 1982.

Strategas then listed the 15 best performing stock sectors during each of these periods. The results were rather startling.

During the 1981-82 recession, alcoholic beverages jumped 65.8 percent, followed by retail department stores, up 51.3 percent. Not far behind were household products, savings and loans, restaurants, broadcasting, electronics, health care and Insurance -- all up more than 30 percent.

During the 1990-91 recession, tobacco took the top prize with a 48.4 percent gain while health care products jumped 31.7 percent. Twenty percent plus winners were retail drug stores, footwear, personal care, defense electronics, and pharmaceuticals.

The recession of 2001 was the shortest of the three, but the performance of various sectors was still rather impressive. Unfortunately, that turned out to be a rally within a bear market that didn't really bottom until March 2003.

That experience (the bear market of 2000-02) probably weighs heavily on today's investors who think we'll see weakness beyond 2008. I guess that could happen, but if we look at the packages under our Christmas trees, it doesn't seems likely.

That cute little box with the red bow holds an iPhone. Maybe Apple (AAPL $180) isn't the cheapest stock in the market, but you can download Audible (ADBL $9) books on it. And that big box that looks like a flat-screen TV? Well, low and behold, it is a flat-screen TV. More than that, the technology that's going to merge our TVs with the Internet and telephone service is just around the corner, and do you know who's going to make that happen? Try Cisco (CSCO $27).

Unlike the glittering tech stocks of the 1990s that were long on promise and short on earnings, today's tech leaders are long on cash and profits, and lean on expectations. As a result, they're more attractive than ever.

Perhaps the best way to play tech is through an Exchange Traded Fund or ETF. Here are two tech ETFs each with different risk characteristics. PowerShares Dynamic Technology (PTF $26.77) boasts that its index derives from a "proprietary methodology that incorporates technically advanced and robust institutional investment research." That's gobblygook for having a more diversified portfolio, the largest stock position being less than 3 percent of the fund.

iShares Dow Jones US Technology (IYW $61.57) is based on the weightings of the Dow Jones US Technology subgroup. Its largest holding is Microsoft with a 12.6 percent position, followed by big positions in Apple, Google, Cisco, and Intel (all greater than 6 percent). The iShares ETF has done better this year (up 12.8 percent year-to-date) compared to the PowerShares ETF (up only 3.7 percent) because of its greater weightings in Microsoft, Apple, and Google.

More conservative investors might opt for the PowerShares while the more aggressive could find the iShares more appealing. In either case, you'll own those companies that make the gadgets that are under your Christmas tree, and in demand for all kinds of other uses around the world, regardless of the recession.

Ray Unger is chairman of Unger Capital Management in Madison. He can be reached at 833-9400; e-mail: rayu@ungercap.com

Ray Unger  —  12/21/2007 10:02 am