With the Dow falling back through the 13,000 level, the threat of a recession is palpable, so it would do investors well to consider the impact an extended 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 proved to be less volatile than the market, but have reported 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.
3-Year Avg. Beta
3-Year Avg. Rev. Growth
3-Year Avg. EPS Growth
|Credit Acceptance (Nasdaq: CACC )||****||0.5||16%||33%||11.8|
|El Paso Pipeline Partners (NYSE: EPB )||*****||0.3||90%||29%||16.5|
Source: Motley Fool CAPS Screener.
Revving its engines
For many people, particularly during a recession, a car is a vital necessity. It's how you're going to be able to get around to find work, then get to and from the job once you land it. But the 8.3% of the population the government recognizes as unemployed might not be a good credit risk to banks and other traditional lenders. Enter Credit Acceptance, an auto financing specialist that provides loans to car buyers regardless of their credit history.
This is the same subset of the population that banks have routinely ignored for their financial needs, but which specialty finance operators like First Cash Financial and EZCORP (Nasdaq: EZPW ) have been profitably catering to for years. It's why traditional banks have used the regulatory powers of Congress and states to hound payday lenders almost out of existence. Advance America, once one of the biggest payday lenders in the country, was beaten down so badly it was finally bought out by a Mexican specialty finance firm.
Through a network of 55,000 car dealerships primarily in Michigan and New York, but also in Texas, Ohio, and Mississippi, Credit Acceptance generated $142 million in revenue in the first quarter, up 15% from the year-ago period. Consumer loan volume jumped 11% to almost 58,800.
But auto financing isn't an easy business to excel at, as First Cash found out. It purchased a network of buy here-pay here car dealerships a few years back and ended up selling them again soon afterward Credit Acceptance has perfected the niche, but investors remain wary of companies targeting the subprime market and less than three-quarters of the CAPS members rating the specialty financier think it will outperform the market averages.
However, in this economy I see its services as particularly essential and I've rated it to outperform the broad market indexes on CAPS. Let us know in the comments section below or on the Credit Acceptance CAPS page if you agree and add the stock to your watchlist to see if it can drive off to higher profits.
In a liquid state
Gas pipelines are a hot commodity these days and are fueling rich M&A deals as the industry consolidates. Energy Transfer Partners (NYSE: ETP ) is buying Sunoco for its northeastern pipeline network, and the country's largest midstream operator, Kinder Morgan, just completed its acquisition of El Paso, gaining access to its 44,000 miles of pipeline. Additionally, Marathon Petroleum (NYSE: MPC ) is mulling whether to spin off its pipeline assets.
But Kinder Morgan's deal also benefited El Paso Pipeline Partners, which got its former parent's Colorado Interstate Gas business, which it had a majority ownership interest in already, and all of Cheyenne Plains Pipeline. The acquisition will be immediately accretive to El Paso's earnings.
Investing in oil and gas storage and transmission facilities is like betting on the basics of an industry. Despite the best efforts of the alternative-energy crowd, we're not weaning ourselves off fossil fuels anytime soon, meaning we need a way of getting oil and gas from where it's drilled to where it's stored.
Operators like El Paso generate strong, stable, recurring streams of revenue. With a 6% dividend yield and a payout ratio of 80%, El Paso has proved to be a fairly solid performer that ought to continue generating high returns for investors.
All but two of the CAPS All-Stars weighing in on El Paso believe it will outperform the broad indexes and Wall Street is unanimous in its opinion of further gains. Keep track of its progress by adding El Paso Pipeline Partners to the Fool's portfolio tracker, then tell us in the comments section below if you think its stock will be transported to a higher plane.
Take a recess
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