5 Stocks to Beat the Recession

With the Dow below the psychologically significant 12,000 mark, and approaching 11,000 from the wrong direction, Foolish investors should consider the impact a prolonged recession might have on their portfolios. Before you succumb to the temptation of moving to an all-cash position, consider stocks that have the ability to hold up in tough times.

I used the stock screener at our investor-intelligence database, Motley Fool CAPS, 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 that's around half that of the S&P 500 (or even less), these companies ought to react less violently to any market swoon.

By adding in a measure of cheapness -- these stocks also carry a below-average P/E ratio -- we build in an additional margin of safety. However, with CAPS investors rating these stocks at four or five stars, we're getting companies that are expected to outperform.

The screen found 39 stocks, including the five promising candidates below:

Source: Motley Fool CAPS.

Preserving the opportunity
While Buffett might have been right to invest in railroads, you could piggyback on that idea by investing in KMG Chemicals, a specialty chemical company that makes nearly 50% of its revenue from the wood preservatives used to treat railroad crossties. In the third quarter, KMG saw creosote sales jump 27% over last year, on the basis of strong demand from railroads. However, sales of penta, a preservative used to treat telephone poles, saw revenue fall as oil distillate prices rose. While overall revenues are up, margins are getting squeezed from the higher costs and lower margins generally realized from creosote sales.

Shares are off about 35% this year, and they got an extra push down when KMG reported results in June. Its bad news included slow sales in its animal-health division, after a cool spring delayed the onset of fly season. Farmers strapped by higher feed costs thus delayed purchases of chemical products, but KMG says it will realize much of those absent sales in the current fourth quarter.

As the sole North American supplier of penta, KMG also supplies the U.S. with most of its creosote. It has some nominal competition with Monsanto (NYSE:MON) for herbicides, but with a modest annual dividend of $0.08 (for a 0.7% yield), KMG Chemicals trades at a very cheap enterprise value-to-free cash flow ratio of 10.

CAPS member ZoomAddict also likes the business KMG operates in, as well as its beaten-down value: "Solid company in a hot sector that is about sixty percent down on the index. Added at a P/E of 18."

Drilling for fun and profit
Although its ticker symbol is often confused for that of a certain computer company, contract driller Helmerich & Payne seems to be pumping out profits as fast as it can keep its rigs in place. That seems to underscore the guidance the company has been releasing this year, pointing to orders to build 20 rigs. With margins, revenue, and cash flow all at peak levels, shares of the offshore and land driller nearly doubled in value this year before giving up some of their gains. Now, with Helmerich & Payne's killer quarter surpassing so-so news from Patterson-UTI (NASDAQ:PTEN), shares may be ready for a rebound.

CAPS member pugwee feels that the driller's technologically advanced rigs are the key factor keeping it at the forefront of the industry:

Right now anything oil and gas is on fire. I like [Helmerich & Payne] because the rigs they make are more efficient, easier to set up and move. They also have less impact on the enviroment than the conventional ones being used today. This company is leading the way for future drilling technology.

Take a recess
Market downdrafts can wreak havoc on your portfolio, but there's no reason to hide your money in the mattress. These five recession-fighters could keep your portfolio on the upswing, but it pays to start your research on these stocks on Motley Fool CAPS. Use the screener, read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Then weigh in with your own thoughts on which stocks you think can keep the wolves of recession at bay.