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A deep well

Paul Sullivan


At times like this, most investors have a tendency to turtle, even though we all know the market is full of bargains.

It's hard to go shopping in the middle of an apocalypse, but if you are able to overcome $120 a barrel oil, the apparent pop in the Canadian housing price bubble and the current shrill panic about the cost of food, get out your wallet and spend like it's 1991.

In fact, that was the last time there was a credit crisis. Instead of Bear Stearns, the US Fed was bailing out the savings and loan business, but that was the last time the markets were so cheap. The S&P 500, for instance, is trading at 13.7 times estimated forward operating earnings — at the peak of the dot.com frenzy it was trading at 28.4 times, so it's a half-price sale!

What to buy? Well, it's probably easier to spot what not to buy — automobile stocks? Mortgage lenders? But the one that sticks out like a free sample is the oil industry. In case you missed it, ExxonMobil has just posted a record quarterly profit. That's an all-time, all industry record: net income climbed by 14 per cent in the quarter to $11.66-billion (U.S.), or $2.13 a share, compared to $10.25-billion, or $1.76 a share, for the last quarter of 2006. Quarterly revenue was a cool $116.64 billion.

While you may not want to re-mortgage your already debt-burdened domicile to buy a single share of ExxonMobil, which is now going for $92.50 on the NYSE, there are still reasonably priced alternatives. Take Calgary-based Husky Energy, for example, which is trading at half that price, $46.83 (Canadian) on the TSX.

I can't think of anywhere better to spend $46.83. Husky just had a pretty good quarter of its own, posting net income of $887-million, or $1.04 a share, up from $650 million or 77 cents a share the year before. But the future is even brighter. BP PLC just swapped a stake in its Toledo, Ohio refinery, for a piece of Husky's Sunrise oil sand project, which is projected to produce 200,000 barrels a day by 2020. At the same time, Husky is targeting 30 per cent more revenue in 2008 over the previous year — more than $20-billion. And CEO John Lau says he will spend $15-billion on major overseas acquisitions over the next two years. All the signs point to greater growth and profit for Husky. Instead of complaining about the cost of fuelling up the SUV, sell it, buy a bicycle and follow chief Husky shareholder Li Ka-Shing up the petroleum path. When was the last time Li Ka-Shing made a bad investment decision?

Trading about the same price as Husky is the controversial yet intriguing Archer Daniels Midland Co., (NYSE: ADM). The Motley Fool calls Archer Daniels Midland, the former linseed milling company that has become a giant in the production of ethanol (which happens to be one of Husky's featured products under the Mohawk brand), one of its best stocks for 2008, and it's hard to disagree. While editorialists are waging war against biofuels, as the cost of crude continues to rise, ethanol remains a strong mid-term alternative.

Archer Daniels Midland will release its third quarter results April 29, but there are other signs that biofuels are going to do well in the short term, at least. On news that ethanol overcapacity will ease by fall, the Biofuels Digest Index, gained 2.72 per cent in the week ending April 25 , and Archer Daniels Midland itself was up 2.56 per cent to $47.31 (U.S.). Archer Daniels Midland calls itself the world leader in bio-energy and is now run by a guy from Chevron. Last year, it acquired a stake in Wilmar International, Asia's leading agricultural processor. So, as the market figures out which commodity to price higher, biofuel or biofood, Archer Daniels Midland has both!

One Canadian biofuel stock that's a fraction of the cost, with probably a fraction of the security is Toronto-based SunOpta Inc., which has recovered from a nasty write-down in its fruit business in January, but is poised to become a biofuel force through its SunOpta Bioprocess Inc. division, which processes biomass for ethanol production. Trading at about $5.36, down from its 52-week high of $15.50, SunOpta could be a tasty snack. Just keep the Pepto-Bismol handy.

These are just a few examples of stocks that seem ideally situated for the current scenario of higher commodity prices and consumer conservatism. It probably goes without saying that this is not a good time to buy stock in consumer goods companies. According to the US National Retail Federation, U.S. consumers will spend an average of $138.63 on their mothers for Mother's Day this year, compared to the $139.14 they spent last year. Forget that the total take will be $15.8 billion—when Americans decide to spend less on their mothers, you know it's time to look elsewhere.

But then there's always Wal-Mart, where consumers go when times are tough. It's at its lowest P/E ever, and while Target Inc.'s sales declined 5 per cent over the holiday season, Wal-Mart was up 2 per cent. Maybe Wal-Mart will be the last guy to turn the lights out.

Wherever you look, there are outstanding individual stocks. As the market heads south, your sector-based funds may also migrate, but individual stocks represent companies that have what it takes to thrive in tougher times.

Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.

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