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 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. Let's take a closer look to see if that theory holds.

Stock

CAPS Rating
(out of 5)

3-Year Avg. Beta

3-Year Avg. Rev. Growth

3-Year Avg. EPS Growth

P/E Ratio

PPL (NYSE: PPL  ) ***** 0.2 16% 22% 10.3
Hi-Tech Pharmacal (Nasdaq: HITK  ) **** 0.7 27% 58% 9.4

Source: Motley Fool CAPS screener.

A utilitarian approach
A year ago, utility operator PPL was bolting on additional assets in the U.K. from purchases made from German utility E.On. It was the second helping PPL had dived into in two years, but it appears management knew what it was up to. Second-quarter earnings beat analyst expectations primarily because of the strength of its U.K. business. In fact, 71% of its reported earnings came from those operations, and even when looking at ongoing operations they still added up to 60% of profits, up from less than half a year ago.

As utilities struggle to come to grips with economic uncertainty, lower prices, and higher regulatory costs, we should expect to see more mergers and acquisitions. Kinder Morgan (NYSE: KMI  ) bought El Paso at the end of last year and Duke Energy (NYSE: DUK  ) just finished its acquisition of Progress Energy. Global power and utility deals in the second quarter jumped 84% to $47 billion from the first quarter of 2012.

Although the back half of the year is expected to be softer for PPL due to higher taxes and lower margins -- though the U.K. business remains the bright spot -- analysts remain upbeat about its prospects and have increased their earnings estimates for the full year as well as next year.

Just last week, CAPS member DrGoldin gave the green thumb to PPL, saying:

I've had my eye on PPL for a while, since it's one of the last bargain utilities on this good earth, but I was afraid to green-button it because I do think money is going to start wandering away from utilities generally. Then came the earnings surprise, and today analysts were tripping over themselves to upgrade this happy stock. So I have to think it will outperform. It's certainly a very solid investment.

Tell me in the comments section below if you agree, and then share whether you think M&A will continue to be a part of PPL's growth strategy.

No generic opportunity
Many might not guess that Teva Pharmaceutical   (NYSE: TEVA  ) , being the world's biggest generic-drug maker, has a significant branded-drug portfolio that accounted for 42% of its $4.5 billion in second-quarter revenues. At the other end of the spectrum you'll find Hi-Tech Pharmacal, a small generic shop that had $61 million in total quarterly sales with its generics business accounting for 85% of the total.

While generics sales were 10% higher, its branded prescription products fell 44% to $3.3 million as its cold medicine Lodrane was yanked from the shelves after the FDA said it hadn't gone through the regulatory approval process, despite the fact that it had been on the shelves of pharmacies for 50 years effectively treating colds. Its biggest seller remains its generic version of Flonase made by GlaxoSmithKline, which accounted for almost half of sales.

By focusing on cold remedies like nasal sprays, generic and branded alike, Hi-Tech ensures it will have a regular stream of customers throughout the cold and flu seasons. Not glamorous, perhaps, but a steady performer regardless of what economic conditions may be.

I'm rating Hi-Tech Pharmacal to outperform the market indexes, but tell me in the comments box below if you agree its opportunity is nothing to sneeze at.

Take a recess
Many investors are attracted to small-cap health-care stocks like Hi-Tech because they hold the allure of substantial short-term gains. But there is more than one approach to building long-term wealth and retiring well. In our free report "3 Stocks That Will Help You Retire Rich," we reveal some stocks that could help you as well as some winning wealth-building strategies. Click here to keep reading.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. 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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