With the Dow still below the psychologically significant 12,000 mark, investors would do well to consider the impact a prolonged recession 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 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 less than that of the S&P, these companies ought to react less violently to any market swoon.
By adding in a measure of cheapness -- these stocks also carry a price-to-earnings ratio that's less than average -- we build in an additional margin of safety. However, with CAPS investors rating them at three to five stars, we're getting companies that are expected to outperform. Our data suggests that the highest-rated stocks in the database significantly outperform the lowest-rated ones.
When I ran the screen, it returned 42 stocks. Below, I've listed five that look like they could do well in any extended downturn.
|
Stock |
CAPS Rating (5 max) |
3-Yr Avg. Rev. Growth |
3-Yr Avg. EPS Growth |
Beta |
P/E Ratio |
|---|---|---|---|---|---|
|
Rio Tinto |
**** |
34.1% |
41.1% |
0.9 |
15.3 |
|
EZCORP |
**** |
18.3% |
41.2% |
0.8 |
13.8 |
|
ONEOK Partners |
**** |
123.0% |
16.7% |
0.5 |
11.8 |
|
Denbury Resources |
**** |
30.5% |
27.5% |
0.9 |
16.8 |
|
Comstock Resources |
*** |
37.2% |
26.2% |
0.0 |
16.1 |
Source: Motley Fool CAPS Screener.
Feeling gaseous
The market's myopia is on full display with its reaction to the pullback in various commodity prices, and how it abandoned shares of Denbury Resources. Using some proprietary methods and its Jackson Dome natural gas fields, Denbury teases oil out of rock formations. In a classic "baby-with-the-bathwater" mind-set, the market has lopped off some 35% of Denbury's value since the beginning of last month, despite it not needing exorbitant oil prices to turn a profit. In fact, those halcyon days when oil traded at just $34 a barrel was all it needed to break even. The rest is gravy.
Just before the bloodletting began last month, CAPS member AHavoc noted that Denbury's recent deal with Genesis Energy
Recent deal with Genesis provides Denbury with attractive long-term financing for CO2 operations infrastructure, and feedstock for Genesis continued growth. With the funds from this transaction Denbury can repay bank line and have cash left over for future growth. EPS excellent; RPS excellent; top in group; top quarterly, profit margin and ROE; Good volume movement for group. Healthy stock.
Build on it
If any business ought to prosper during a recession, it's pawn shops. And so far EZCORP has been making it look easy with a 47% increase in operating income on its pawn business and a 36% increase in payday lending operating income (despite closing a number of stores as the industry remains under attack). It's gotten so bad that payday industry leader Advance America
Although a deal to acquire a chain of pawn stores in Florida, Tennessee, and Georgia recently fell through -- causing Texas-based EZCORP to revise earnings estimates downward by a penny per share -- another case of seeming overkill had the market at one point pawning off $134 million of its market cap; nearly 20%. Yet the natural benefits that would accrue to this type of business during a recession are what have attracted investors like CAPS member bradford86:
EZCORP, Inc. is my play on the mortgage crisis. When people need cash advances they go to the payday loan shops and [EZCORP] is willing to provide these individuals solutions to meet their short term cash needs. It's going to be providing its investors with their long term cash needs through continued growth and is valued in the market like it's not. I'm thinking about getting a cash advance to buy this company.
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 look to have the goods to keep your portfolio on the upswing. 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 dogs of recession at bay.
