With the Dow having dipped below the psychologically significant 11,000 mark last week, 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 Motley Fool CAPS supercomputer 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 less than that of the S&P, these companies ought to react less violently to any market swoon.
By adding in a measure of cheapness -- these stocks 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 three to five stars, we're getting companies that are expected to outperform. Our data suggests that the highest-rated stocks in the database significantly outperform the lowest-rated ones.
When I ran the CAPS screen, it returned 64 stocks. Here's five that look like they could do well in any extended downturn.
|
Stock
|
CAPS Rating (5 max)
|
3-Yr. Avg. Revenue Growth
|
3-Yr. Avg. EPS Growth
|
Beta
|
PE Ratio
|
|
AmTrust Financial Services (Nasdaq: AFSI )
|
****
|
44.7%
|
26.0%
|
0.8
|
8.2
|
|
Companhia Paranaense de Energia (NYSE: ELP )
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*****
|
26.6%
|
72.3%
|
0.9
|
6.3
|
|
Enbridge (NYSE: ENB )
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****
|
26.6%
|
15.7%
|
0.5
|
11.2
|
|
Gardner Denver (NYSE: GDI )
|
****
|
22.3%
|
47.0%
|
0.7
|
10.2
|
|
Natural Gas Services (NYSE: NGS )
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****
|
23.5%
|
32.8%
|
0.7
|
15.7
|
Source: Motley Fool CAPS Screener.
Natural Gas Services
By focusing on nonconventional areas of the natural gas market -- such as coal bed methane, gas shales, and tight gas -- Natural Gas Services is drilling in on the idea that the easy deposits have already been found. All-Star CAPS member autodealercfo feels that although NGS has a few concentrated customers, like XTO Energy (NYSE: XTO ) , with demand remaining high, it should excel:
[Natural Gas Services] has managed impressive growth over the past few years and should continue for several years. It has the necessary capital to build its rental fleet currently and should within a year or two be able to self fund it's capital requirements.
Risks to this company include the dependence on a few major customers which include XTO Energy which has been … on a buying spree lately of natural gas properties and the fact that it's rental compressor terms are short and any slow down in gas production would impact the company very quickly. It mainly competes with small shops but does have competitors that are large in size and have greater financial resources than [Natural Gas].
AmTrust Financial Services
A property and casualty insurer that derives more than half of its revenue from small-business workers' comp, AmTrust Financial attracted the attention of CAPS member cdempsey1221 back in June because of its ability to make smart acquisitions, much like rival Employers Holdings (NYSE: EIG ) , which has also bought out some smaller competitors:
Amtrust is actually a phenomenal p&c company, and also has a knack for making incredible shrewd acquisitions of other p&c companies. They may have some debt, but they have plenty of cash to cover their debt; they're metrics for measuring the success of their underwriting are almost outstanding for this typical low margin industry. They current have around a 88% combined ratio which is outstanding (especially since the industry average is around a 95%).
If they can continue to structure their aquistions correctly; hold their U/W standards in place; and grow organically, you will see some great growth in earnings from this company.
Companhia Paranaense de Energia
The potential for continued high demand for electricity in Brazil has CAPS members like KenN513 getting heated about the potential for growth:
Brazil, Energy, Hydroelectric. This (mostly) state-owned utility should grow with the economy of the largest economy in South America. They are well funded with lots of extra cash. Cash flows are excellent. They continue to build their infrastructure.
Very nice statements and very growth prospects.
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. It pays to start your research on these stocks on Motley Fool CAPS. Use the screener, read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Then weigh in with your own thoughts on which stocks you think can keep the dogs of recession at bay.
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