Five Stocks to Bet on the US Economy

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cyclical exposure can be a double-edged sword. It does increase risk and volatility in the middle term, but it can also produce some attractive buying opportunities for investors who can look beyond current uncertainty and bet on the long term resiliency of the US economy. Here I'll list five companies for a long-term bet on the US economy.

Ford (NYSE: F) reported this week that it sold more than 55,000 of its iconic F-Series trucks during the month of September, bringing the total figure in the first three quarters of 2012 to 463,733 units, an 11.4% increase over the same period last year. The year-to-date total is a new high over the last five years, shedding some positive light on the strength of the economic recovery in the US.

Although they are by no means one of the most commented-on economic indicators, sales of small pickup trucks convey information about spending by small businesses, so they do have some relevance in terms of economic analysis. However, company-specific factors also play an important role here, and the fact that Ford has been building better vehicles with higher fuel efficiency is clearly a positive factor for the company regardless of the strength of the economic cycle.

Both Ford and General Motors (NYSE: GM) have made notable improvements on several fronts over the last years: they are better positioned for growth in terms of financial resources, operational efficiencies and the quality of their products. Even when demand is uninspiring due to economic weakness, good companies have the possibility to add value for their shareholders in the long term, getting ready to deliver substantial growth when economic conditions turn for the better.

The resurgence of Ford and General Motors after the financial crisis which almost brought then down – GM even had to get government help to survive – is a great example of the resiliency of US businesses when they are properly managed. And the good news is that both companies can still be bought for very attractive valuations, with forward P/E ratios in the area of 6 or 7 times earnings estimates for the next year.

It should be noted that earnings estimates are subject to a big margin of error in the auto industry, as high fixed costs in a cyclical business make profit figures particularly hard to estimate. Both Ford and GM could see volatile times if the economy doesn't improve in the middle term, but they are strong enough to successfully go through any difficulties over the following quarters, and they offer huge upside potential over the long haul.

Big banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) wouldn't have survived the financial crisis without government intervention, and they are still trying to put their house in order by restructuring their balance sheets and adapting their cost structure to a  smaller asset base.

The banking sector is quite exposed to the economic cycle, as the financial health of their clients is a big determinant of profitability, so these companies are dependent on economic conditions to help them fully recover from the devastating effects of the credit bubble.  

But they are both showing some stabilization in terms of book value per share, so the worst may be over in terms of value destruction at these financial institutions. Bank of America and Citigroup are trading at historically low Price to Book value levels in the area of 0.45 and 0.53 respectively, providing plenty of upside room from a valuation point of view.

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<img src="/media/images/user_1532/c_large.png" />

This is in stark contrast to Wells Fargo (NYSE: WFC), which trades at a Price to Book value of 1.3. Wells Fargo is much healthier than the other two banks, since it didn't get into the same kind of excessive risk taking as Bank of America and Citigroup during the bubble. This makes Wells Fargo a high-quality alternative in the American banking system, standing to benefit from improved real estate conditions and credit expansion over the following years.

Wells Fargo may be more expensive than Bank of America and Citigroup, but it’s still reasonably priced at a P/E ratio of 11.5 and yielding a 2.5% in dividends. Besides, the company is benefiting from the problems of its competitors, as it’s able to gain market share and continue expanding while competing banks need to keep streamlining their operations.

Long term investors need to see the whole picture, not just current conditions. When you have an investment horizon consisting of several years, as opposed to several months, companies in industries like US autos and banking are offering some substantial upside potential at current levels.

acardenal owns shares of Ford. The Motley Fool owns shares of Bank of America, Citigroup Inc , Ford, and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Ford, General Motors Company, and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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