With the stock market getting jittery again, it would do investors well to consider the impact a renewed downturn might have on our 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 a handful of stocks that look like they could do well in any extended downturn.
CAPS Rating (out of 5)
3-Year Avg. Beta
3-Year Avg. Rev. Growth
3-Year Avg. EPS Growth
|Dolby Labs (NYSE: DLB )||*****||1.0||16%||16%||11.2|
|HollyFrontier (NYSE: HFC )||****||0.5||25%||48%||4.7|
|Sturm, Ruger (NYSE: RGR )||*****||0.2||17%||91%||17.4|
Source: Motley Fool CAPS Screener.
Initially, the potential loss of the revenue windfall from Microsoft's upcoming Windows 8 operating system threw investors in Dolby Labs for a loop back in August. The loss of the cash cow represented by licensing its sound technologies for the ubiquitous OS led the stock to the slaughterhouse. Where shares had once been flying high at $70 a share, they now go for less than half of that.
Once the dust settled, though, it became clear that Dolby wasn't getting tuned out. Sure, Windows was an easy -- and lucrative -- means of generating revenues, but the sound specialist noted any potential revenue loss won't occur until 2013 when the OS is expected to be released, and Dolby can still approach individual OEMs like Dell (Nasdaq: DELL ) or Hewlett-Packard (NYSE: HPQ ) to license the technology directly to them.
Moreover, the way users are consuming their technology is changing. Streaming video is beginning to come into its own and mobile communications are now an important component of the viewing ecosystem. It's no surprise then that Dolby's two fastest-growing segments are broadcast and "other markets," which includes mobile. Revenues in the fourth quarter for the two segments were up 29% and 69%, respectively.
CAPS member troym72 thinks Dolby's earnings report the other day reflects a turning point in the market's perception of its future.
After beating earnings yesterday and releasing a rather rosy revenue forecast for 2012, I think Dolby will start getting some of the respect it deserves. Dolby's forward P/E indicates the stock could easily be worth $40 per share by the end of 2012, that's not taking into account that Dolby says they will do better than the street expectations in 2012.
Add Dolby to your watchlist to see if the market agrees there can be life without Windows.
A refined opportunity
Oil refiners such as Valero (NYSE: VLO ) , Tesoro, and HollyFrontier are reeling from the news that Enbridge (NYSE: ENB ) will be buying the 50% stake in the Seaway pipeline owned by ConocoPhillips and reversing the flow from Cushing, Okla., to the Gulf Coast. They're all down by double-digit percentages this past week.
Because of a lack of infrastructure in Cushing, refiners have been profiting from bottlenecks that developed there and the resulting spread in oil prices between West Texas intermediate and Brent crude. Enbridge's purchase is expected to minimize the bottleneck, and WTI oil prices jumped over $100 a barrel on the news.
With some top names turning their backs on the business, there's blood in the water, and HollyFrontier senses it, too, but HollyFrontier sees it as a chance to give investors an infusion by launching a $100 million share-repurchase program. And as CAPS member ThePoulTrend notes as one of his reasons for recommending the stock, the company also just announced a special cash dividend in the amount of $0.50 per share, payable on Dec. 8.
You can tell us on the HollyFrontier CAPS page or in the comments section below if the Enbridge purchase will be such a defining moment, and then follow along to see how it fares by adding it to your watchlist.
Locked and loaded
Revenues for gun maker Sturm, Ruger rose 37% in the quarter to $81 million and profits of $0.56 per share were strong as well, beating analyst expectations by 40%. Even ne'er do well Smith & Wesson (Nasdaq: SWHC ) , which saw profits fall year over year last quarter (more than half of which was the result of its security division that it's now trying to sell), still came in ahead of forecasts and expects revenues to increase 4% to 8% in fiscal 2012. Its stock has bounced more than 30% off its lows from earlier this year, while Ruger has more than doubled.
According to the FBI's NICS data, background checks for firearms purchases are running almost 13% ahead of last year through Oct. 31. And though you can't necessarily extrapolate background checks to gun sales -- it's not a one-to-one correlation -- with potential customers getting the necessary paperwork out of the way, it's still a good sign that more sales could be coming Sturm, Ruger's way
Maybe that's why CAPS members feel safer about choosing Sturm, Ruger as a stock to beat the markets. More than 92% of those rating the gun maker see it outperforming the S&P 500 (and a similar percentage even rate Smith & Wesson to shoot holes in the critics' outlook).
Tell us on the Sturm, Ruger CAPS page or in the comments section below if you think it will win this shootout at the O.K. Corral, then follow the gunslinger 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.