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It's Time to Recession-Proof Your Portfolio

There are ominous clouds on the horizon. Europe is very slowly heading for some sort of disaster, China's economy is slowing, and the U.S. economic recovery seems to be ready to run off the track with the slightest push.

With this in mind I think it's time to look at ways to protect yourself against another significant downturn. If the market goes south, it's good to have some safety nets in place and even some ways to profit from the economic misfortune. There's no way to perfectly "recession-proof" your portfolio, but here are three strategies that will keep you sleeping soundly at night if the economy takes a turn.

Cash is king
A margin of safety should always be on the minds of investors, and there's no better margin of safety than cash on hand. Three companies that I included in a list I called a new breed of value stocks are some of the most well-known companies in the world and they have enough cash to buy a fairly good-sized country.

Apple (Nasdaq: AAPL  ) , Cisco (Nasdaq: CSCO  ) , and Microsoft (Nasdaq: MSFT  ) all have lots of cash, nice dividend yields, and strong positions in their respective businesses.


Market Cap

Cash and Investments (net debt)

Percent of Market Cap in Cash

Dividend Yield

Apple $533.7 billion $110 billion 20.6% 1.9%
Cisco $90.7 billion $32 billion 35.3% 1.9%
Microsoft $250.9 billion $56.7 billion 22.6% 2.6%

Source: Yahoo! Finance.

I'll admit, none of these companies got through the last recession and the financial crisis of 2008 without taking some damage to their share prices. But I still think that with a dividend yield of 1.9% or more and at least 20% of the market cap in cash, these stocks shouldn't fall too far if we head into another recession. Even if we don't, their values provide plenty of upside for investors.

Movies are a recession treat
When a recession hits, we cut back on a lot of things, but movies aren't necessarily one of them. In fact, domestic box office actually rose 10% in 2009 when we were in the depths of the recession, a trend we saw in the early-2000s recession as well. Betting on the box office has actually been better going into a recession than coming out of it.

Source: Box Office Mojo.

Two picks to take advantage of this trend are IMAX (NYSE: IMAX  ) and Disney. IMAX is growing its network of theaters worldwide and takes a disproportionate amount of revenue versus normal theaters. Disney has a track record of strong movie titles, and the Marvel and Pixar studios appear to be clicking on all cylinders. Combine the movie studios with couch-potato favorite ESPN and Disney has entertainment that's made for recession conditions.

If there are two movie companies that would come out smelling like a rose in the next recession, I think it's one with oversized screens and another with mouse ears.

Don't forget your shorts
Shorting stocks often scares investors, but it can be a great way to balance out your portfolio and profit from a decline in the stock market.

One stock that has perfection priced in is I did a calculation last month that showed Amazon would have to grow sales more than 38% over the next five years and increase net margin to 4% to live up to its current stock price. If we go into a recession, that kind of growth will be out the window, and the stock will plunge.

Another stock that will suffer if the economy goes south is Caesars Entertainment (Nasdaq: CZR  ) . This gaming company is already teetering on the brink of disaster, and a recession could push it over the edge. In the first quarter of 2012, the company reported $520.7 million in EBITDA -- a proxy for cash flow from a resort -- and had $562.0 million in interest expense from its $19.9 billion debt load. Las Vegas was hit hard by the recession three years ago, and any deviation from the company's current slow recovery could send it into even more dire straits.

What investors should watch for when looking for short picks is companies that are overvalued or that have large debt loads that will require refinancing or share offerings if earnings take a hit. A recession can bring these stocks back to reality and provide a way for you to profit if/when the market crashes.

Prepare for anything
I've begun preparing my portfolio for the worst by adding companies with large cash positions, high dividends, and extremely strong competitive positions. These stocks should limit my downside in the case of a recession while providing some upside if we avert disaster. Over the next few weeks, I will be adding short positions to provide some upside if the market goes down. What do you plan to do to recession-proof your portfolio?

Our analysts have identified some stock picks that will be long-term winners in good times and bad in a report called "Secure Your Future With 9 Rock-Solid Dividend Stocks." The report is free when you click here.

Fool contributor Travis Hoium owns shares of IMAX and Disney and manages an account that owns shares of Apple and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Microsoft, Walt Disney, Cisco Systems, Apple, and Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, IMAX,, and Walt Disney, as well as creating bull call spread positions in Apple and Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2012, at 1:45 PM, TMFDarwood11 wrote:

    I'm not sure I'd agree with AAPL as a pick. The company will possibly do well for a decade or more. On the other hand, it thrives on brand loyalty and is the high priced brand, which I have gone so far as to declare a "luxury brand."

    It was recently reported that that people between 35 and 44 saw a 59 percent decline in median household net worth between 2005 to 2010. That was the largest drop of all age groups, and this is a group that apparently loves Apple products.

    In fact, all of the groups, aged 54 and below, have seen a larger decrease in net worth than the groups aged 55 and above.

    This economy is not going to take off like a rocket, and these age groups will continue to feel the squeeze. To me, that makes AAPL a risky purchase.

    In fact, I suggest that buying into one or two companies is very risky. As an alternative example, Vanguard's VDIGX has a 1.99% yield and provides an opportunity to buy into about 50 companies, in a variety of sectors.

    there is also VDAIX,which offers a 1.99% yield, about 100 companies and more of a "value" tilt. Of course, there is also VHDYX with an approximate 2.75% yield.

    It would be possible to purchase two of the Vanguard funds and avoid concentration in one or two, or three companies. Of course, some investors really like the white knuckle ride, and that's their choice.


  • Report this Comment On June 27, 2012, at 1:57 PM, rhealth wrote:

    "In fact, I suggest that buying into one or two companies is very risky. "

    Exactly Darwood. Shorting individual companies is even more dangerous and complex. You will then have to monitor news in the sector, news with that stock, short interest, short squeeze, buyout (anything i'm leaving out) I short currencies, commodities or indexes to avoid these kinds of problems. It's still tricky though.

    Travis what sectors would you short? Gaming? Retail?

  • Report this Comment On June 27, 2012, at 2:56 PM, TMFDarwood11 wrote:

    "Cash is king

    A margin of safety should always be on the minds of investors, and there's no better margin of safety than cash on hand,"

    Let me also say, "here here."

    I've been carrying more cash since 2007. That's what I do when I get nervous. about the general state of affairs.

    So I currently have a cash stake of about 25%. I sleep a lot better each night, knowing that my cash stake is eroding at about 2% per year, rather then making some guy at Goldman Sachs rich, or dropping 25% while I sleep.

    But to compensate, I've invested a bit more aggressively with the remaining 75%. That's because that money is for the long view, which is to say, 25 or more years into the future.


  • Report this Comment On June 27, 2012, at 6:28 PM, LMSolo2 wrote:

    If I believed in cash, I'd be sleeping on a very lumpy mattress indeed. As long as the cost of living increases in a predictable manner, cash will always be a losing proposition. Cash never grows. Cash only ever depreciates.

    I'm old enough to have been a teen during the Cuban Missile Crisis. If things get really bad on a global level you can kiss your investments--and your rear end goodbye. You either believe the sun will rise in the morning or you don't.

    Of course cash is a very handy thing to have when the basement floods or the house burns down. But unless one is wealthy to begin with, do you really need all that cash?

    If you are worth more money than you'll ever need to live comfortably for the rest of your families life, why take any risk at all?

    Alas, if you are 62 years old with a genius 14-year old child who is already going to Juilliard Pre-college, it comes down to simple math- If you are the sort of person who was wise enough to still have the first penny you ever made, then you MAY be able to retire one day. Personally, I need to invest. I don't get a kick out of "the action". I believe that the American Dream will prevail. And what if I am wrong? Well, there's always the half pound of gold jewelry I bought over the decades simpler times;)

    Of course, I'm being a little snotty. It all boils down to your personal tolerance for risk. We all have to live with ourselves. And in the final analysis, life itself is short and capricious.

    I most sincerely wish us all the luck that we deserve and have worked for.

  • Report this Comment On June 27, 2012, at 7:09 PM, Barboy wrote:

    I have three apple laptops, two iPhones, an apple desktop, an iPad and Apple TV at home, and Im still not sure I'd invest there. They are vulnerable on price and office integration but so far no one seems to be able to beat them on marketing and simplicity of interface (and I believe these two characteristics are inexorably linked for apple). Every time we add an apple product to the stable, price is an issue. I think they trade on future value, as defined by the next big product. Microsoft is already dead and buried in many people's mind on basis of growing irrelevance. So I don't think these guys are recession proof. Cisco too on the basis that new systems seem to be developed daily that are intended to circumvent traditional office systems. I work in film, and yes, it is recession proof, but it is facing so many other challenges. So my mattress will be filled with gold, or at least steel ingots. Somehow I think this will be more comfortable than Apple Stock

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