With the Dow just below the 12,000 mark, but the threat of a double-dip recession still palpable, investors would do well to consider the impact a renewed downturn 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 of one 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 three stocks that look like they could do well in any extended downturn.
|
Stock
|
CAPS Rating
(out of 5)
|
3-Year Avg. Beta
|
3-Year Avg. Rev. Growth
|
3-Year Avg. EPS Growth
|
P/E Ratio
|
| Cirrus Logic (Nasdaq: CRUS ) |
***** |
0.7 |
27% |
336% |
7.1 |
| Hatteras Financial (NYSE: HTS ) |
***** |
0.1 |
68% |
42% |
6.5 |
| Pan American Silver (Nasdaq: PAAS ) |
**** |
0.9 |
25% |
39% |
11.0 |
Source: Motley Fool CAPS screener.
An Apple a day
Buying into audio chip specialist Cirrus Logic is really an investment that says you're expecting Apple (Nasdaq: AAPL ) to maintain its ability to produce iconic, consumer-oriented products. After all, it derives some 59% of its profits through Apple, so it will live and die by how that relationship plays out. Just like TriQuint Semiconductor and OmniVision Technologies (Nasdaq: OVTI ) , Cirrus will see its stock rise and fall based on whether its audio chips continue to be part and parcel of the Apple product line. When they aren't, that's when investors have an opportunity to pick this stock up cheap.
Its latest quarterly report came in shy of analyst revenue expectations (although within its own guidance), but that was largely a result of its revamped energy segment, which is in turnaround mode. It shouldn't be much of a worry for committed investors, yet the market may very well sell off its shares again at the approach of an iPhone 5 as product transitions lead to less-than-expected demand of suppliers. Consumers end up holding off on current products in anticipation of the newest gadget hitting the market.
As CAPS member Wade32ru points out, a company that supplies such critical components to Apple shouldn't be selling at such a discount: "Wow, a tech company that supplies critical components to AAPL is trading at 9x earnings. Let me think about that for a minute..."
Add Cirrus Logic to your watchlist to see if the market makes the connection between it and the iPhone 4S' huge sales numbers.
Take two aspirin
The Fed's expansive low-interest policies are a danger to our economy as they discourage savings and don't do much for the housing and auto markets. Mortgage rates are already at record lows and the industry is still dead, so Operation Twist won't do much to help and will hurt those living on fixed-income investments. Yet it will also raise the risk level for REITs that invest in mortgage-backed securities, like Hatteras Financial, RAIT Financial Trust (NYSE: RAS ) , and ARMOUR Residential REIT, which will see higher prepayments while realizing lower yields on reinvestment.
While Hatteras has been culling its portfolio so that prepayments were lower in the second quarter than in the first, they jumped from an annualized rate of about 18.5% to 28.3% in the third, something it squarely blames Operation Twist for causing.
With 91% of the CAPS All-Stars rating Hatteras believing it will still go on to outperform the broad market indexes, it's apparent they think it will be able to successfully negotiate the risk generated by the Fed's misguided policies and the attractiveness of focusing on the shorter maturation period of adjustable-rate mortgages.
You can tell us on the Hatteras Financial CAPS page or in the comments section below if you think the forces arrayed against it are too powerful to overcome, and then follow along to see how things play out by adding the stock to your watchlist.
Can't touch this!
One of the benefits of investing in silver as opposed to gold is the industrial use of the gray metal, at least in a growing economy. When economies are in recession, the bear market can play havoc with pricing. Although we've seen reports about economic growth in China and India easing this year and next, they're still engaged in some full-throated expansion that will have them driving up demand for silver. Yet even bullion should do well from the Fed's low-interest-rate policies mentioned above, so low-cost producers like Coeur D'Alene Mines (NYSE: CDE ) and Pan American Silver should be among those to profit best.
The sovereign debt crisis is by no means assuaged, even though Greece has abandoned its plans to hold a referendum on its EU bailout and its prime minister survived a vote of confidence ballot. There's a lot of whistling past the graveyard going on that Greece will prove itself willing to make the hard choices necessary to avoid collapse, meaning a strong pressure switch in the market for silver is still present.
More than 1,060 CAPS members have rated Pan American, and 95% think it will beat the Street. Even the seven analysts watching Pan American think it will outperform. You can tell us on the Pan American Silver CAPS page or in the comments section below if you agree, and then follow the drama by adding it to the Fool's portfolio tracker.
Take a recess
Market downdrafts can wreak 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.
RSS Headlines
Fool UK