With the Dow back below the 11,000 mark and the threat of a double-dip palpable, it would do investors well to consider the impact a renewed 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 proved 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 of 1 or 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 a margin of safety. However, with the CAPS community according them high ratings, we're getting companies that are expected to outperform.
Below are a handful of stocks that look like they could do well in any extended downturn.
CAPS Rating (out of 5)
3-Yr. Avg. Rev. Growth
3-Yr. Avg. EPS Growth
|AmBev (NYSE: ABV )
|American Science & Engineering (Nasdaq: ASEI )
|Semtech (Nasdaq: SMTC )
Source: Motley Fool CAPS Screener.
This beer's for Brazil
Economists were banking on even the Brazilian economy to start slowing in the second half of the year, as second quarter GDP growth eased to 3.3% from 4.5% in the first. Yet the latest results show the month of July moving up at its fastest pace in six months, with economic activity expanding 0.46%, a nice jump up from the contraction the economy had experienced in June.
The strength of the Brazilian economy has helped strengthen the results of a number of U.S.-based companies with a significant presence there. McDonald's, which is a powerhouse all its own, benefits from the growth of Arcos Dorados (NYSE: ARCO ) , its largest Latin American franchisee that derives a third of its revenues from Brazil. Likewise, Anheuseur-Busch InBev (NYSE: BUD ) has its sagging domestic beer sales looking pretty foamy on the basis of AmBev, its Latin American subsidiary that is also the exclusive distributor of PepsiCo products in Brazil.
With the country increasing its minimum wage and bolstering its middle class, Brazil is the third largest beer market in the world behind China and the United States. CAPS member JTMcGee finds those demographics a nice challenge for AmBev to face.
Great numbers all around. Great exposure to Latin America. Tough to call an outperform after ABV and SPY diverged, but in the long-run this one should beat exceed market returns. Brazilian growth is great, and I like the embedded play on a rising minimum wage in Brazil.
Add AmBev to your watchlist and see whether its results can remain as frothy as they have been.
Latin America could become a big market for American Science & Engineering, which just sold three of its specialized X-ray scanning devices used to protect against terrorism and drug and weapons smuggling to an unnamed Latin American customer for the first time. Its Z Backscatter Vans are mobile scanning systems similar to the airport screening devices that have people upset because of the level of detail they generate. You can drive the van past a vehicle or cargo container and get a detailed photo of what's inside, or the vehicle can move past the van.
The world is no less a dangerous place despite the death of Osama bin Laden, and security remains a lucrative space for many companies. ASE faces stiff competition from L-3 Communications (NYSE: LLL ) , which offers a variety of scanning equipment, and OSI Systems. Sales were off last quarter for ASE, but that had more to do with the state of unsure budget processes than real lack of demand.
With more than 1,000 CAPS members weighing in on ASE, 98% of them see it beating the broad indexes. Scan the American Science & Engineering CAPS page and add the stock to the Fool's free portfolio tracker if you think its position in the market is secure.
The networking industry just came off a particularly nasty downturn, and with major telecoms all anticipating reining in capex spending, it's clear the likes of Finisar (Nasdaq: FNSR ) Oplink, and others are not yet out of the woods. Semtech, which counts on large customers like Finisar and Cisco Systems, may feel the pinch, though the rising importance of its high-speed transceiver products means it may rise above the fray.
Certainly the few dozen CAPS All-Stars rating Semtech see it as coming out on top, as 93% believe it will beat the Street. Add the analog and mixed-signal semiconductor maker to your watchlist to keep track of how it performs in relation to its best customers.
Take a recess
Market downdrafts can wreck havoc on your portfolio, but there's no reason to hide your money in the mattress. These three recession fighters look to have the goods to keep your portfolio on the upswing, but it pays to start your research on these stocks on Motley Fool CAPS. Then weigh in with your own thoughts on which stocks you think can keep the dogs of recession at bay.