Where to Invest 2009: Safer Harbors

Business-school textbooks will tell you that a stock price should reflect the company's future earnings. Sure enough, when investors feared this fall that a serious recession would cripple corporate profits, they rushed to sell.

But not every company's fortunes depend on whether the U.S. economy is shrinking or growing. And the good news for investors is that some of these defensive investments are selling at their lowest valuations in years--and paying decent dividends.

Duke Energy (DUK) and Southern Co. (SO)

Since 1960, nationwide demand for electricity has declined in only two years-1982 and 2001. Yes, the economy was bad in those years, but electricity consumption still rose again in the following years-even when the broader economy hadn't recovered. That kind of steadiness pays off: Over the past six slowdowns, utility stocks averaged a nearly 5 percent annual return, according to Merrill Lynch.

Even if 2009 turns out to be one of those years in which electricity demand falls, analysts say the depressed stock prices leave a margin of safety. "At this point the valuations are just downright silly," says Lasan Johong, a utilities analyst for RBC Capital Markets.

A decade ago Duke Energy invested in opening power plants that would produce electricity and sell it to the highest bidder. But these days the Charlotte, N.C.-based company still gets more than three-quarters of its more than $1.5 billion in annual profits from its heavily regulated, highly dependable electricity business in the Carolinas and the Midwest. Even though Duke has nearly $13 billion in debt, its debt-to-total-capital ratio is about 41 percent, on the low side for the industry.

Another southern utility, Atlanta-based Southern Co., also continues to plug along. The electricity generator serves 4.4 million customers in a territory that stretches from Georgia to Mississippi.

Since 1973, a period that includes four recessions and eight bear markets, Southern has generated an annualized 12 percent return for shareholders. "It has the best management team in the industry," says Brian Youngberg, a utilities analyst at Edward Jones. Under CEO David Ratcliffe, the company has locked in lower coal costs and maintained good relationships with state regulators, Youngberg says.

Microsoft (MSFT)

Microsoft is looking a lot like a utility these days. Customers come back year after year to purchase software upgrades of Windows, Office and its other seminal programs, just as homeowners and businesses routinely pay their electricity bills. Even if there's a recession, Chief Financial Officer Chris Liddell told investors in late October, the company expects to increase revenue 7 to 10 percent a year and profits 7 to 12 percent a year.

Microsoft's valuation is also utility-esque, trading at less than 10 times expected 2009 profits. Microsoft has no debt and $20 billion in cash on its balance sheet, giving it plenty of ammunition to buy other companies and boost its future growth.

Johnson & Johnson (JNJ)

Thanks to the market sell-off, investors can buy J&J at its lowest valuation in decades, as measured by the ratio of its price to cash flow. In the first 10 days of October, J&J shares lost nearly 20 percent as short-term traders feared the company's profits would be slammed by currency fluctuations. That's because the New Brunswick, N.J.-based company gets more than half its sales from overseas; when it brings that money back to the United States, its profits are hurt by a strengthening dollar.

But some experts think the worries might be overblown. "Is their business any different now than it was six months ago? The answer is, not really," says Christian Andreach, a portfolio manager of the Manning & Napier Pro-Blend Maximum Term fund and a buyer of the stock. J&J has a yield of about 3 percent and a streak of 46 consecutive years of raising its dividend.

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