2 Stocks to Beat a Recession

The Dow blasted through the 13,000 mark again. But with 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 P/E ratios that are 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.

Stock

CAPS Rating
(out of 5)

3-Year Avg. Beta

3-Year Avg. Revenue Growth

3-Year Avg. EPS Growth

P/E Ratio

EZCORP (Nasdaq: EZPW  ) ***** 0.9 20% 25% 12.0
Main Street Capital (NYSE: MAIN  ) ***** 0.7 99% 39% 9.2

Source: Motley Fool CAPS Screener.

EZ money
A recent late-night TV commercial offering to put $5,000 in your bank account tomorrow without a credit check -- but at a 113% interest rate with 84 payments of more than $450 each (yowser!) -- almost makes payday lenders like Advance America look as friendly as your neighborhood banker.

I've always maintained that payday lenders have never been the kneecapping loan sharks they've been portrayed as. Moreover, a recent Los Angeles Times article noted that even Wells Fargo (NYSE: WFC  ) offers a similar program, charging $7.50 for a $100 advance to be repaid within 35 days. As Advance America noted, "The services we offer today are now mainstream. We are the new norm."

EZCORP is also a payday lender, but it has made most of its money as a pawnshop operator. Its stores might not have the cachet of the Vegas-based Pawn Stars show, but they're exceptionally profitable nonetheless, as soaring gold prices have led a stampede of customers to trade in their gold for cash. EZCORP's revenues have grown at a compounded 22% rate over the past five years, with net earnings up 33% over that same stretch.

Gold prices are retreating now, which means the company may have to rely more on its payday lending services. Last quarter, its signature loans retreated, while bad debt associated with them inched up. Because I still believe global events will push gold significantly higher, I'm not changing my bullish CAPScall on EZCORP. At just 12 times trailing earnings and nine times estimates, the pawnshop operator/payday lender is a heckuva lot cheaper than some late-night lending scheme.

Add EZCORP to the Fool's free, personalized stock-tracking service and tell us on the EZCORP CAPS page if you think gold's got room to move and if EZCORP will rise with it.

Developing profits
Getting in on a ground-floor opportunity is what many investors seek, buying in early to capture the greatest growth and maximize profits. Business development companies, or BDCs, perform a similar function, looking for the next ultimate growth stock and capitalizing on its potential. Combine these two concepts, and you have publicly traded private equity firms like Main Street Capital, which let investors join in the search for tomorrow's hot stock today.

There are plenty of BDCs to choose from, though not all represent the same risk profile or return potential. Dividend yield is typically something investors look at, as BDCs gain preferential tax status by passing on most of their income to investors. Apollo Investment (Nasdaq: AINV  ) , which is a BDC focusing on providing financing to middle-market companies, has a dividend yielding north of 11%. MCG almost hits 16%, while Main Street pays out a dividend yield less than 7%.

Despite the lower ratio, Main Street is an attractive investment because it pays its dividend monthly, rather than quarterly or annually. As CAPS member monthlyincome notes, Main Street just raised the dividend nearly 8%:

The second quarter 2012 dividends represent a 7.7% increase from the dividends declared for the second quarter of 2011 and a 3.7% increase compared to the first quarter of 2012. Including the dividends declared for the second quarter of 2012, Main Street will have paid $7.14 per share in cumulative dividends since its October 2007 initial public offering.

Chasing yield can be a dangerous pursuit, and the attractiveness of receiving a regular paycheck while waiting for Main Street's investments to pay off has led the stock to jump 46% over the past six months. Follow along to see whether this BDC can keep mining the American Dream by adding it to your watchlist.

Take a recess
Market downdrafts can wreak havoc on your portfolio, but there's no reason to hide your money in the mattress. The Motley Fool has uncovered one stock that will be the breakout champ from the coming spike in oil prices. Check out The Motley Fool's free report "The Only Energy Stock You'll Ever Need." Access to the detailed analysis is completely free.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Fool owns shares of and has created a covered strangle position in Wells Fargo. 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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