5 Stocks to Beat Any Recession

As the Dow flirts with the psychologically significant 11,000 mark, investors would do well to consider the impact a prolonged recession might have on their portfolios. It might be tempting to move to an all-cash position, but before you make such a hasty move, take the time to look at stocks that have the ability to hold up in tough times.

I used the stock screener at our investor-intelligence database, Motley Fool CAPS, to look for companies that have proven to be less volatile than the market, but which have been reporting strong revenue and earnings growth over the past few years. With a beta that's around half that of the S&P 500 (or even less), these companies ought to react less violently to any market swoon.

By adding in a measure of cheapness -- these stocks also carry a P/E ratio that’s less than average -- we build in an additional margin of safety. However, with CAPS investors rating them at four or five stars, we're getting companies that are expected to outperform.

When I ran the screen, it returned 35 stocks. Below, I've listed five that look like they could do well in any extended downturn.

Stock

CAPS Rating (out of 5)

3-Year Avg. Rev Growth

3-Year Avg. EPS Growth

Beta

P/E Ratio

BP Prudhoe Bay Royalty Trust (NYSE: BPT  )

*****

17%

17%

(0.1)

10.8

Grey Wolf (AMEX: GW  )

*****

18%

48%

(0.3)

13.4

Netease.com (Nasdaq: NTES  )

*****

30%

36%

0.6

15.9

Transocean (NYSE: RIG  )

*****

36%

146%

0.6

9.1

ViroPharma (Nasdaq: VPHM  )

*****

46%

32%

0.6

10.7

 Source: Motley Fool CAPS screener.

A crude awakening
As the premier name in deep-ocean drilling, Transocean is able to command premium prices for its rigs. During periods of peak demand like we're seeing now, its ability to charge record dayrates -- $650,000 a day over five years -- is unmatched. Couple that with a lucrative contract from Petrobras (NYSE: PBR  ) , and Transocean should find these difficult economic times clear sailing.

Earlier this year, CAPS investor freefall51 argued that Transocean's ability to command top dollar will help this company outperform for years to come:

[Transocean] has terrific market position in deep sea drilling... [Transocean has] a deliberate, disciplined and opportunistic expansion program, geeting out of the crowded shelf drilling business and into more profitable deep sea.... Their new deepwater rigs cost around 750 mm$, with service fees running 500-600 grand a day or 180 mm$/yr or more. Payback is around 4 years, about the lenght of their initial contract terms. The rest of the lifetime of those rigs is pure fun.

Drilling down to profits
As the beneficiary of a bidding war between Precision Drilling (NYSE: PDS  ) and Basic Energy Services, land-based oil and gas driller Grey Wolf has spurned Precision's $1.6 billion bid in favor of Basic's.

CAPS players like chieftan62 had confidence that the company would outperform:

Increasing demand for domestic oil production to lessen foregn oil dependence will result in more demand for services of this nature. The fact that all of their rigs are already obligated only adds optomism when domestic drilling in the Dakotas and Anwar begin in earnest. Having the expertise and strong capitol will enable Grey Wolf, Inc. to acquire more rigs and hence more contracts.

Apparently, both Precision Drilling and Basic Energy agreed.

Not a generic opportunity
Investing in one-drug wonders carries a lot of risk, because a change of fortune can doom the company's viability. ViroPharma has borne the burden of that risk; its stock has been depressed for the past couple of years after hitting a high of $22 per share. With the FDA now signaling that any generic version of its drug Vancocin will need to meet a higher hurdle to gain acceptance, the market has revalued those shares upward, and investors like CAPS player ESTES27112 think ViroPharma will have the breathing room to develop additional therapies:

Rare to have a start up small cap biotech company with earnings and strong cash flows. Assuming a generic drug does not get released in the next year, VPHM should be poised to launch another new drug and make some serious money.

Take a recess
Market downdrafts can wreak havoc on your portfolio, but there's no reason to hide your money in the mattress. These five recession-fighters look to have the goods to keep your portfolio on the upswing, but we haven't heard your thoughts yet. Head over to Motley Fool CAPS now and weigh in with your thoughts on these stocks -- or any others you think can keep the dogs of recession at bay.

Precision Drilling is a Global Gains selection. Petrobras is an Income Investor pick. Netease.com is a Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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