Can These 2 Stocks Beat a Recession?

With the Dow hovering at 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 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 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 is a pair of stocks that look like they could do well in any extended downturn, but let's take a closer look to see if that theory holds.

Company

CAPS Rating (out of 5)

3-Year Avg. Beta

3-Year Avg. Rev. Growth

3-Year Avg. EPS Growth

P/E Ratio

PotashCorp (NYSE: POT  ) ***** 1.0 18% 24% 15.6
Quality Systems (Nasdaq: QSII  ) **** 0.5 18% 16% 13.1

Source: Motley Fool CAPS Screener.

Revving its engines
With the Midwest in the grips of the worst drought in 50 years, corn prices have surged to record highs. The Department of Agriculture says the drought has ripped through 90% of the Corn Belt with 40% of the crops in the worst areas. Soybean prices are also on the rise.

Since the beginning of June, potash producer PotashCorp has seen its shares jump 14%. As the drought worsened, other fertilizer companies such as CF Industries (NYSE: CF  ) and Mosaic (NYSE: MOS  ) have watched their shares rise 15% and 22%, respectively.

Corn is an essential feedstock -- used not only for consumption, but for ethanol and animal feed as well -- and has a big effect on how fertilizer companies react. When prices soar, as they are now, farmers tend to plant more of it and that means they need more fertilizer. Those making potash, nitrogen, and phosphate will probably see the results when farmers start planting next year's crop.

PotashCorp reported second-quarter results that beat analyst expectations on revenues, but fell just short on earnings as a result of charges related to an investment in a Chinese fertilizer company. Last year, as commodities soared, fertilizer companies boosted production to capture more profits leading to a surfeit of nitrogen and potash on the market. PotashCorp had been in a weak pricing environment, but that should change for the better going forward.

More than two dozen analysts tracking PotashCorp on CAPS unanimously agree it should be able to beat the market indexes going forward, and with nearly 4,900 members of the investment community weighing in on the fertilizer producer, 97% agree it should beat the Street. Let us know in the comments section below or on the PotashCorp CAPS page how you think the drought will affect pricing, particularly if the markets crumble.

Health care is in bad shape
There's an acute shortage of physicians, and as Obamacare is implemented and tens of millions more Americans are brought into the health care system, the dearth of doctors will be exacerbated. The law is expected to increase the number of primary care physicians by 3,000 over the next decade; 45,000 will be needed.

With a weak economy, high costs of opening and maintaining a practice, and the likelihood that reimbursements will decline, more doctors are joining physician groups, which in turn are being gobbled up by hospital systems in an effort to streamline costs. Obamacare is also speeding up the process of physician group acquisition because there will be greater regulatory impositions when most of the law takes effect in 2014.

With that as the backdrop, it's easier to understand the weak results posted by health care IT specialist Quality Systems, which relies upon large numbers of independent practitioners to buy its software and equipment. Although sales were up 18% over the year ago period, they still missed analyst expectations and profits dropped 18%, also below forecasts. The double miss also included warnings about future trends in the industry. Management remains confident about its prospects (aren't they always?), but "evolving conditions affecting our industry and uncertainty in predicting future results."

Some analysts also fear Quality Systems is losing market share to rival Cerner (Nasdaq: CERN  ) and athenahealth. The former, which reported its own earnings yesterday that beat expectations, actually caters to hospitals so it would seem to benefit from the trends identified above.

Can Quality Systems beat back the tide? Tell me in the comments box below whether you think it remains a quality investment.

Take a recess
There's another resource besides fertilizer that's put down roots and is expected to grow: It's called gold. Perhaps you've heard of it. The Motley Fool's found a hidden gem of a stock that can allay your fears about inflation while providing nuggets of profit for your portfolio. Download the free report "The Tiny Gold Stock Digging Up Massive Profits" and get the inside scoop before the gold rush hits.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of CF Industries. Motley Fool newsletter services have recommended buying shares of athenahealth and Quality Systems. 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.

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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 August 23, 2012, at 12:22 AM, MHedgeFundTrader wrote:

    While in Zermatt, Switzerland recently, I took the opportunity to undergo my annual physical. Over the years, I have discovered that American doctors are so paranoid about getting sued that I can never get a straight answer about anything, so I do all of my physicals abroad.

    I like visiting Dr. Christian because he is cut from the same cloth as I. He is a small wiry guy without an ounce of fat, and keeps his hair tied behind in a ponytail. Nothing like treating your patients through example. He has served as the team doctor on several Himalayan expeditions, reaching the incredible altitude of 25,000 feet without oxygen. He includes Mount McKinley and Aconcagua on his resume.

    He gave me the good news: I had blood pressure of 110/70 and a resting pulse rate of 50. This was at an altitude of 5,500 feet, which always elevates one’s blood pressure. The bottom line was that I had the heart of a teenaged Olympic athlete. He told me that whatever I was doing, to keep on doing it. I said that would be strapping on a 60 pound backpack and climbing the 1,500 foot mountain in my backyard every night after work. He answered that would explain everything.

    Dr. Christian usually allocates extra time for patients my age to deliver them bad news. That was unnecessary in my case. So we killed time trading notes on our favorite climbs.

    I also grilled him on the state of the Swiss medical system. He complained that it was going downhill, but was nowhere near as bad as in the US, where his brother practices medicine. Everyone here gets medical care after paying a small premium. His liability insurance was only $3,000 a year, compared to $100,000 in the US. The only malpractice suits in Switzerland are brought by Americans, and they always lose.

    The main reason medical costs were so low is that the people of Switzerland were so much healthier. Walking around the streets here, most people look like they are triathletes. And they do this despite smoking like chimneys. Maybe they are related?

    Life expectancy in Switzerland is 82.2 compared to only 78.2 in the US. And the quality of life at old age is much better. Obesity is rampant at home, but rare in the Alps. Diabetes is unusual in Switzerland, but epidemic in the US. Over 400,000 Americans undergo kidney dialysis in the US, while the treatment is almost unheard of in Europe. This is why the US is spending 12% of GDP on health care, on its way to 17%, while Switzerland is flat lining at 8%, with an older population.

    I thanked Dr. Christian for his advice. The total bill? $200. I headed to the local pharmacy to get a one year supply of my anti-cholesterol drug, which I can buy 90% cheaper than at home. That allows me to keep my total health care costs under $500 a year.

    I then celebrated my good fortune by stepping across the street for a bratwurst and a beer, which my American doctor once banned me from. There, I planned my coming assault on the Matterhorn.

    `The Mad Hedge Fund Trader

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