5 Stocks for a Slowing Economy

The signs that the economy is slowing down are starting to become more frequent. In that context, it's time for investors to consider how their portfolio will fare in this environment, and which stocks stand to benefit in a tougher economic climate.

Is a "double-dip" in the cards?
When the yield curve inverts (i.e., when long-term interest rates drop below short-term rates), it's a leading indicator of a recession. Since it achieved a one-year high of 3.75% in February, the 10-year Treasury yield has dropped to just above 3% -- despite the imminent end of the Federal Reserve's bond-buying program. With short-term interest rates at zero, there is no way the yield curve is going to invert, but it is flattening and that could indicate the bond market is anticipating a significant slowdown in the economy, or another round of bond buying by the Fed, QE3 (which would probably occur if Chairman Ben Bernanke believes the recovery has stalled).

Cyclicals are out, defensives are in
On Wednesday, I pointed out that the second quarter has witnessed investors rotating out of cyclical stocks (energy, materials, industrials) into defensive ones (consumer staples, health care, utilities). That rotation suggests the stock market believes we've at the top of the business cycle. The following table contains five defensive stocks that haven't participated in that trend so far, and that could yet benefit from it:

Company

Q2 % Return

Forward P/E

Boston Scientific (NYSE: BSX  ) (3%) 19.7
Clorox (NYSE: CLX  ) (1%) 17.3
Hershey (NYSE: HSY  ) 0% 18.8
Quest Diagnostics (NYSE: DGX  ) (1%) 12.8
Verizon (NYSE: VZ  ) (5%) 15.8

Source: Capital IQ, a division of Standard & Poor's.

Of these five stocks, the ones that look most interesting to me are Quest Diagnostics, based on the combination of low valuation and a high-quality business. Alternatively, investors may want to consider the Healthcare Select Sector SPDR ETF (NYSE: XLV  ) or the Consumer Staples Select Sector SODR ETF (NYSE: XLP  ) . 

There are still more defensive stock ideas among the 13 High-Yielding Stocks to Buy Today. You can read all about them by clicking here.

Fool contributor Alex Dumortier holds no position in any company mentioned. You can follow him on Twitter. Click here to see his holdings and a short bio. The Motley Fool owns shares of Clorox. Motley Fool newsletter services have recommended buying shares of Clorox and Quest Diagnostics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 31, 2011, at 10:59 PM, idahogeo wrote:

    @ tomsega

    Yeah, these algorithm-based trading models are sweet. The TMF has one, too. It's called ZippyTrade, or something similar. I've never used it myself, but I know this guy...

  • Report this Comment On June 01, 2011, at 4:16 AM, Sunny7039 wrote:

    Okay, maybe, just maybe, this is plausible. And maybe your metrics are far more sophisticated, likely to produce a good result, etc., than mine.

    Please explain two things -- in a slowing economy where debt overhang is an enormous problem, why shouldn't our top two concerns be PE ratio and how much cash is on the balance sheet?

    What is it that makes for resilience, after all? For the companies, I mean.

    (As for our own resilience, I think it's likely to consist in being debt-free and having substantial cash reserves.)

    My questions are, what is on these company's balance sheets? And why would you consider any stock with a PE above 12 to be a good buy right now? Those make more sense during an expansion, don't they?

    Also, just because these stocks have not done well under QE2, and thus have not participated in the upswing of the broader market, is that any reason whatsoever to think they might turn around now? I know that wasn't the principal reason for picking these stocks -- the nature of their businesses was the principal reason -- but how is current underperformance a supporting reason? I don't see it. Underperformance does not mean undervalued. Not necessarily.

    N.B. I'm not talking about a small investment (100 shares). I suppose you could buy 50 shares of each of these stocks and not be sorry five years later. That much probably is true.

    My questions are in reference to where the big chunks of the stock portion of our portfolio should be concentrated.

  • Report this Comment On June 01, 2011, at 11:19 AM, energysystems wrote:

    Sunny-As a rule, even in good times, I look to invest in low PE and low debt stocks. I prefer to buy below the avg. S&P PE trading point. The only stocks I own that are above 12 P/E are TEVA and SDRL, both of which have huge growth upside, and in TEVA's case, trading at a substantially lower P/E than historically for that company. I agree with you, buying into companies with outlandishly high PEs in a time of contraction/slowdown is a dumb move. One of the first thing to happen is PE ratio contraction. Personally, I'm holding a lot in cash(which is blah I know). There are certainly some higher P/E stocks that I'd like to pickup when their multiples come down(DEO, PEP)

  • Report this Comment On June 01, 2011, at 4:24 PM, plange01 wrote:

    TIME FOR OBAMA TO GO! the american economy is in a state of collapse.this is getting worse than the financial meltdown.the american people need to step in remove obama from office and move the presidental election up to this fall otherwise the country will collapse

  • Report this Comment On June 02, 2011, at 9:53 PM, Rarusnans wrote:

    I think you are the one who collapsed, plunge. )(

  • Report this Comment On June 03, 2011, at 11:38 PM, Juggernaut46 wrote:

    Plange... are you really comparing today's economy with the catastrophe that almost wrecked not just our domestic economy but nearly the global economy?! A hangover isn't the same as ODing on herione my friend. Seems there is way too much negativity in the air for what's been repeatedly termed a "transitory" period in the economy with a hiccup in the May jobs number and a downtick in manufacturing data during what is traditionally a slower quarter historically. I maintain the belief Ben Bernanke has us covered.

  • Report this Comment On June 04, 2011, at 10:26 AM, johnsyn wrote:

    That was more than a hiccup, Juggs, only 54,000 jobs??? I don't agree with plange to hold the elections this fall, no one has enough momentum to shake the mainstream star-worshippers into reality and away from a president who admitted to using heroin.

  • Report this Comment On June 04, 2011, at 10:49 AM, johnsyn wrote:

    With the latest job report showing only slightly more than 54,000 (non-farm) jobs were added to the private sector in May, the new uncertainies of the Middle East and Greece, I find that investing in REIT such as CYS and RSO with yields of 18.55% and 15.15%, P/Es of 10.4 and 11.8, and PPS of $13 and $6.60, respectively, a safer haven, than the market volitility right now with the low yields. Another favorite is NRT (North European Oil Trust) with government ownership as a safety net, although it only pays 6%. I'm now going to look towards REITs in Hong Kong real estate, which is still booming and going up in price in leaps and bounds.

  • Report this Comment On June 09, 2011, at 9:10 PM, mart25 wrote:

    Any ideas as to what's happening to Apple??

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