JPMorgan Picks 16 U.S. Stocks to Hold in a Recession

By Elizabeth Stanton

Oct. 17 (Bloomberg) -- JPMorgan Chase & Co. recommended 16 companies, including McDonald's Corp. and Merck & Co., that may outperform the U.S. stock market during the ``global recession'' it expects to unfold during the next two years.

The ``Franchise 16'' list merges the strongest convictions of its 78 stock analysts with a ``top-down'' view that the banking crisis threatens global growth, said Thomas J. Lee, chief U.S. equity strategist at the New York-based bank.

``There is growing demand from clients for core holdings that outperform in a global recession,'' Lee said in a phone interview. ``Every week that passes that credit markets remain challenged, there's incremental damage to the macro economy.''

The group of companies rose 1.2 percent today, compared with a 0.6 percent drop in the Standard & Poor's 500 Index. Lee lowered his 2009 earnings estimate for companies in the index and his year-end forecast for the benchmark.

The 16 companies, including Dow Jones Industrial Average components 3M Co., Hewlett-Packard Co., McDonald's and Merck score high in three criteria, JPMorgan said. The requirements are low debt levels, return of cash to investors in the form of dividends or buybacks, and profitability. In addition, they're viewed by the bank's analysts as having the ability to prosper in a global slowdown.

JPMorgan, the largest U.S. bank by market value, this week said the world economy is already in a recession and cut its global growth forecast for 2009 to 0.9 percent from 2.1 percent.

Lee said the decision to compile the list was made two weeks ago, after the moved to fresh lows for the year that extended its year-to-date loss to 25 percent on Oct. 3. Since then, the main benchmark for U.S. equities has fallen a further 14 percent, deepening the loss to 36 percent.

`No Risk Appetite'

``We did it to provide something for clients to focus on beyond the distractions of current market conditions,'' Lee said. Fundamental analysis of stocks in the past two weeks has been ``overwhelmed by de-leveraging, the seizure in the credit markets, and the fact that there's almost no risk appetite.''

Lee cut his 2009 earnings estimate for the S&P 500 to $75 from $88, after lowering it from $93 on Oct. 3. He reduced his year-end forecast for the benchmark to 1,125 from 1,375. That represents a 20 percent gain from today's close.

The Franchise 16 list is distinct from JPMorgan's U.S. Analyst Focus List of researchers' favorite companies among the 1,200 they cover.

The new list includes 16 companies because only that many met the criteria established for it, Lee said.

``Maybe the number will change,'' he said.

The companies are:

3M Co.
Baxter International Inc.
Colgate-Palmolive Co.
CA Inc.
Devon Energy Corp.
General Mills Inc.
Gilead Sciences Inc.
Google Inc.
Hewlett-Packard Co.
McDonald's Corp.
Merck & Co.
Monsanto Co.
Nucor Corp.
Philip Morris International Inc.
Union Pacific Corp.
Visa Inc

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net