With the Dow well above the 12,000 mark again, but the threat of a recession still present, 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 two stocks that look like they could do well in any extended downturn.
(out of 5)
3-Year Avg. Beta
3-Year Avg. Rev. Growth
3-Year Avg. EPS Growth
|American Capital Agency (Nasdaq: AGNC )
|Gilead Sciences (Nasdaq: GILD )
Source: Motley Fool CAPS screener.
The long-term view
It should have come as no surprise that mortgage REIT American Capital Agency cut its dividend from $1.40 to $1.25 as we've started seeing this play out over a number of similarly situated mortgage investors. Last December, Invesco Mortgage Capital (NYSE: IVR ) reduced its dividend as a result of the Fed's low interest rate policies. Capstead Mortgage did, too, as did Annaly Capital Management.
I've noted on several occasions that the Fed's Operation Twist program artificially keeps interest rates low, thereby hurting a large number of financial institutions by encouraging borrowers to refinance at lower rates. It clears the books of banks and mortgage lenders of higher-interest loans and replaces them with others that have far less favorable terms. American Capital Agency reported its prepayment rate at the end of the year was 14%, some 56% higher than the fourth-quarter rate. Fed chairman Ben Bernanke has said the low-rate environment is likely to continue for several more years.
American Capital also announced a buyback of its stock, something Invesco also did, which led analysts to suggest its financial situation wasn't as strong as it let on. I wouldn't go so far with AmCap, though. It's also benefiting from the Fed's policies, making money on the difference between short- and long-term rates (the spread). It borrows low-cost short-term money and invests it long term for higher returns.
CAPS All-Star jwray01 says the rewards of the Fed's policies outweigh the risks for American Capital:
The only risk is that the fed might raise short term interest rates. But they've said they won't do it till at least 2014. I think they won't do that until there's an economic recovery, in which case the rest of my portfolio would go up. This makes it a good diversification play.
Add the mREIT to your watchlist and tell us on the American Capital Agency CAPS page if you think the risk profile is rising on these mortgage plays.
When you're hot, you're hot
Certain areas of medical research are almost faddish in the way biotechs and drugmakers swarm into them. A few years ago, cancer research was the hot funding area; today it's hepatitis C.
Gilead Sciences, though, may have won the race, beating out Bristol-Myers Squibb (NYSE: BMY ) and its recently purchased candidate and trumping treatments by Merck and Vertex with a therapy that, when combined with ribavirin, completely eliminated the hep-C virus in genotype 1 patients after four weeks.
As Motley Fool blogger Amanda Alix notes, it's not just hepatitis treatments that make Gilead a compelling investment, but also its noteworthy work in another top-tier treatment arena, HIV:
Besides the hepatitis C development, Gilead has other irons in the fire. Its mainstay business, HIV treatments, is gaining ground: the combination drug Truvada, a once-a-day tablet, and Atripla, which combines Truvada with Bristol Myers Squibb's Sustiva, both enjoyed increased sales. Gilead also hopes to gain approval of its new HIV drug, Quad, and be marketing the product by the third or fourth quarter of this year.
Follow along to see whether the drugmaker can develop even more novel advances by adding Gilead Sciences to your watchlist.
Take a recess
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