HEADLINE: WITH RATES LIKELY TO RISE, STOCKS TO FAVOR, AVOID: JOHN DORFMAN
BYLINE: John Dorfman in Boston at firstname.lastname@example.org or (617) 964- 2026 through the New York newsroom. Editors: Braitman, *Hays
BODY: (Commentary. John Dorfman, president of Dorfman Investments in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or its clients may own or trade investments discussed in this column.)
Boston, April 15 (Bloomberg) -- Like an expert butcher slicing a salami, the Federal Reserve cut interest rates over and over again last year.
Its forceful action of 11 cuts in 2001 probably kept the recession from getting worse than it was. Now that the economic slowdown may be over, most investors expect the Fed to raise rates this year.
Rising rates are generally bad news for stocks because they retard economic activity and make bonds an attractive alternative. Perhaps no stock is completely immune from rising rates, but stocks of debt-free companies are less affected than most.
Three debt-free stocks that I like in this environment are Wackenhut Corrections Corp., United Fire & Casualty Co. and Jakks Pacific Inc.
Let's look first at the low-debt stocks. Wackenhut, with headquarters in Palm Beach Gardens, Florida, is one of the two largest U.S. companies that operate prisons. It has facilities in the U.S. and internationally.
The company is 57 percent owned by Wackenhut Corp., a security company that last month agreed to be acquired by Group 4 Falck A/S of Denmark. Wackenhut Corrections had its first public stock sale in 1994 and has earned a profit each year since.
The company earned a respectable 15 percent on common equity last year. Shares sell for 14 times earnings and 0.5 times revenue, which is pretty cheap. Analysts expect earnings of $1.01 this year.
Scandals? Sure, Wackenhut Corrections has had them, as is typical for prison- related organizations. Whether prison guards are public or private employees, there will be occasional riots, escapes and allegations of brutality or sexual misconduct -- some of which will be true.
Overall, however, I believe private companies such as Wackenhut can run prisons at least as well as most states, counties or municipalities, which are often tangled in bureaucracy. Private prisons are a growing business, as witnessed by the growth rates posted by Wackenhut Corrections over the past five years -- an average of 19 percent a year in earnings and 32 percent in revenue.