Four Great Companies on Sale

Abandoning stocks is not the best response to the turmoil gripping the markets. Stocks will roar back at some point. We suggest you find ports in the storm that will keep your money relatively safe while giving your portfolio a fighting chance to grow, even through this downturn.

What kinds of stocks are we talking about? Cheap ones, for starters. As recession fears rise and credit woes deepen, price-earnings ratios are shrinking. But even stocks with low P/Es are vulnerable if a recession cuts into profits, so you want a solid business with steady earnings prospects.

In this environment, big is certainly better. A fortified balance sheet is also a must -- this is no time for a company to need to borrow money or issue new shares. And even though their share prices may look tempting, we would avoid firms with ties to the financial and housing sectors for now. Below are four attractively priced stocks we think meet all these criteria.

eBay (symbolEBAY)

EBay has been pummeled lately because growth has been slowing in its core online-auction business. Granted, the company will never be the growth stock it once was, but at its October 7 close of $16.50, eBay trades for a measly nine times expected 2009 earnings of $1.92 per share. "At 20 or 25 times earnings, you could argue whether it's an attractive stock," says Larry Coats, manager of Oak Value fund, which owns the shares. "But at these levels, there shouldn't be a whole lot of debate."

Auctions account for only about one-third of revenues, and eBay has plenty of other businesses that are growing at breakneck pace. PayPal, the online-payments system, saw its second-quarter revenues rise 33% from the same period in 2007, and revenues from Internet phone service Skype were up 51%. Together, these two businesses also account for one-third of eBay's revenues.

Other bright spots include ticket seller StubHub, shopping sites such as Shopping.com, and several classified-advertising sites. Moreover, eBay announced on October 6 that it will buy Bill Me Later, a service similar to Pay Pal that large retailers favor, for $945 million. Although some of these businesses don't have the profit margins of the auction business (as is the case for fixed-priced sales, which are a growing share of eBay's business on its shopping sites), analysts still expect overall earnings growth of 14% in 2008 and 10% next year-not bad considering anemic consumer-spending forecasts.

EBay's financial strength should allow shareholders to sleep well at night. It has no debt and $5 billion in the bank, and it generates $2 billion annually in free cash flow (earnings plus depreciation and other noncash expenses, minus expenditures to maintain and expand the business). A lot of that cash ($4.7 billion in the past two years) has been returned to shareholders in the form of stock buybacks. The rest can be used to bolster eBay's growing businesses and buy new ones.

AT&T (T)

Like eBay, AT&T has fallen from favor because of slowing growth in a core business -- in this case, old-fashioned, wire-line phone service. (The company lost nearly one million such customers in the second quarter alone.) But residential wire-line service accounts for just 18% of the company's revenues.

AT&T has more wireless customers (73 million) than any other U.S. carrier. That business, which generates one-third of revenues, is growing nicely. Second-quarter revenues were 16% higher than a year ago, thanks in part to burgeoning demand for wireless data -- much of it from users of Apple's iPhone. AT&T, based in San Antonio, is also a leading provider of phone and data services to corporations (a slow-growing business) and broadband high-speed Internet service to consumers (a fast-growing one).

Overall, analysts see AT&T's earnings growing 8% this year and 10% in 2009. At $25.74, the stock sells for eight times estimated 2009 profits of $3.25 per share. Robert Wyckoff Jr., one of the managers of Tweedy Browne Worldwide High Dividend Yield Value fund, estimates that AT&T's various businesses, if sold off separately, would be worth between $37 and $42 a share. In addition, the stock pays a $1.60 annual dividend, resulting in a fat, 6.2% yield.