"What If" Stocks for a Worst-Case Market

Morgan Stanley's Rick Bensignor doesn't expect another Wall Street collapse, but that doesn't mean he won't be ready for one

By Gene Marcial

From the way the stock market has been behaving, the lows that the indexes hit on Sept. 21 might prove to be the real bottom that investors have been wishing for. But what if it wasn't? What if something untoward happens -- like another terrorist attack? Indeed, many situations could still knock the budding bull off its feet.

That's what Rick Bensignor, chief technical strategist at Morgan Stanley, has been pondering -- the "what if" scenarios that could torpedo the market. Although he's one of those market watchers who believes the bottom was hit on Sept. 21, Bensignor also thinks portfolio managers need to look at the alternatives. He asks: "What if the market heads substantially lower -- or substantially higher? Am I properly positioned?"

Ongoing scenario analysis is essential, given today's unsure conditions, argues Bensignor. How can investors protect themselves against the possibility that stocks could head into another downward leg? Bensignor emphasizes that he isn't suggesting that they will, but money managers and investors should explore the very possibility that the market might, he argues. "Investors need to be prepared for such an eventuality."


  Certainly, shorting some stocks or indexes, or hedging your portfolio by using certain derivatives could be among the possible approaches. But for investors who aren't inclined to short-sell or trust derivatives to hedge their portfolios, one of the better alternatives, advises Bensignor, is to own stocks that have had "good relative performance" -- shares that are outperforming their respective group or a major benchmark.

So Bensignor has compiled a list of stocks as potential "what if" candidates that should perform well if the market goes south. His technical strategist group, which includes Jonathan Dodd and Nora McAuley-Gitin, ran a scan of all stocks in the Standard & Poor's 500-stock index, Nasdaq 100, and Dow Jones Composite (65 stocks) index to see which are trading at or within 5% of their all-time highs.

They came up with seven stocks:

Major brewer Anheuser-Busch (BUD ), currently trading at 50 a share; global medical-products company Baxter International (BAX ), 56; Johnson & Johnson (JNJ ), the world's largest and most comprehensive health-care company, 61; PACCAR (PCAR ), a maker of heavy-duty trucks, 79; soft-drink producer PepsiCo (PEP ), 50; Southern Co., (SO ), a major electricity supplier, 25; and TXU (TXU ), an energy-services company, 52.


  Bensignor cautions that if the market continues to go higher, these stocks may not necessarily make significant advances since they've already been hitting new highs.

His group also compiled a second list of seven other stocks. These are trading at or within 5% of highs only since Jan. 1, 2000:

Avon Products (AVP ), the major cosmetics company, currently trading at 52; FedEx (FDX ), the global air-express delivery service, 61; Phillip Morris (MO ), the world's largest tobacco company, 53; Raytheon (RTN ), the second-largest U.S. defense contractor, 38; Ryder System (R ), a major truck-leasing outfit, 27; giant multiline retailer Sears (S ), 53; and Union Pacific (UNP ), the largest U.S. railroad, 65.

Benzsignor points out that there's no guarantee that these 14 companies will continue to be stars in a major pullback. "But any stocks that are still within 5% of their all-time high -- given the market weakness of the past two years -- are worth thinking about having in one's portfolio," asserts Bensignor. Indeed, such "what if" stocks might prove to be the best choices for a worst-case scenario.

Marcial is BusinessWeek's Inside Wall Street columnist