Where to Invest 2009: Higher Risk and Return

The stock market seems to be pricing many companies as though the credit crunch and recession fog will never lift. Call us crazy, but surely some financial firms and energy companies won't go out of business in 2009. In fact, they might even thrive once the economy gets past the current mess. These riskier picks could offer high rewards.

Annaly Capital Management (NLY)

Annaly Capital might be one of the few housing-related companies to make more money as the housing market gets worse. The New York-based real estate investment trust, or REIT, profits from borrowing money at low interest rates, then buying mortgages that pay out a higher interest rate. Most of the mortgages Annaly buys are insured by Fannie Mae and Freddie Mac, the now notorious agencies at the center of the housing bust.

Investors naturally wonder what will happen to Annaly if the mortgages it holds go bad and Fannie and Freddie can't guarantee the debt. But some analysts say that while nothing is certain, the government's takeover of the two agencies in September is a de facto guarantee that the government will cover the mortgages. The lower price "just gives value investors like us an opportunity to get involved," says Armburster, of the Al Frank Fund, which has been buying the stock.

Lowe's (LOW)

Lowe's stores sit at the intersection of Recession Road and Housing Bust Boulevard. Fewer homes are being built, so the stores sell less paint and lumber for new construction, while consumers are feeling the pinch of the slow economy and cutting back on spending. But many analysts also think the Mooresville, N.C.-based home-improvement retailer is a good bet at about 16 times expected 2009 profits. Lowe's also owns nearly all of its stores, giving it the flexibility to sell and lease back some of its properties if it wants to raise cash.

Transocean (RIG)

One of the few things that tops the collapse in the stock market is the recent free fall in the price of oil. That plunge has sent investors fleeing from Transocean, the world's largest operator of offshore-drilling platforms. Its stock has fallen $163 last May and trades at less than five times expected 2009 profits. Oil-service firms traditionally trade at price/earnings multiples below most stocks, due to the industry's historic volatility. However, Transocean is at its cheapest since 2001.

General Electric (GE)

The worldwide slowdown has dented demand for GE's products, such as aircraft engines and washing machines. Worst of all, the credit crunch has hammered GE's finance business. The Fairfield, Conn.-based company borrows money in the short term to fund itself and help its own customers finance big-ticket GE purchases. In the worst-case scenario, the credit crunch could make it difficult for GE to refinance $330 billion of long-term debt.

GE's stock appears to be priced as if the worst case is not just possible but probable. The stock has fallen by half since we recommended it last year, reaching valuations not seen since the early 1990s. But that dire scenario is unlikely, say analysts. GE has raised more than $15 billion in cash from a stock issue and from an investment by Warren Buffett. Meanwhile, GE and other firms can take short-term loans directly from the U.S. government, clearing up some of the credit worries, says Dan Genter, president of investment management firm RNC Genter Capital Management.

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