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3 Stocks to Beat a Recession

By Rich Duprey - Updated Apr 6, 2017 at 9:49PM

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These undervalued stocks have strong growth prospects.

Even though the Dow remains above the 12,000 mark, it would do investors well to consider the impact a renewed 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 Motley Fool CAPS supercomputer 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 one, 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 are a handful of stocks that look like they could do well in any extended downturn.

Stock

CAPS Rating
(out of 5)

Beta

3-Yr Avg. Rev. Growth

3-Yr. Avg. EPS Growth

P/E Ratio

Dolby Labs (NYSE: DLB)

*****

0.9

16%

15%

18.7

Gildead Sciences (Nasdaq: GILD)

****

0.4

19%

21%

12.9

TeleCommunication Systems (Nasdaq: TSYS)

****

0.8

32%

19%

21.6

Source: Motley Fool CAPS screener.

Do you hear that?
Considering Dolby Lab's fall from grace since the advent of the iPad, it would seem difficult to consider the sound specialist a stock that would hold up well in a recession. Rather, it looks like it would better fall into the camp occupied by computer makers like Dell (Nasdaq: DELL), which is already subject to the whims of consumer spending and was hard-pressed by Apple (Nasdaq: AAPL) taking the computer world by storm with its tablet, than in consumer necessities such as food or clothing.

Because of its novelty and the great design Apple is known for, the iPad was indeed a bright star in the constellation, but now there's plenty of anecdotal evidence they don't get the same usage as a laptop might, which can multitask in the business world, too. Maybe tablets aren't fads, but it doesn't look like the PC is going to be displaced yet.

So the shock to the system Dolby suffered with the PC slowdown may prove to be more temporary than originally believed, and with its movement into digital cinema (and 3-D, where it has 30% of the market), mobile communications, and gaming, the ubiquity of its legacy business has plenty of support.

CAPS member NODISCOJOE believes as I do that its current depressed price levels -- it sits 30% below its 52-week high -- is a very good place to purchase more of the stock.

This is a solid company that has managed to imbed itself into so much of everything that we use on a regular basis that we almost forget its there, that is until earnings are reported. That's when we look at every analyst that's ever downgraded this company and wonder what the hell were they thinking?

Sound off on the Dolby Labs CAPS page or in the comments section below whether I'm missing something in the growth story here.

Price is what you pay
Gilead Sciences is one drug company that works around the backlash that builds up from charging premiums for drugs by offering them at a discount or for free in certain situations to build up goodwill. It then charges a premium everywhere else, but as KV Pharmaceuticals (NYSE: KV-A) found out when it appeared it was going to charge rapacious prices for drugs that had previously been available for a few bucks, sometimes that doesn't sit well.

Gilead's HIV drug Atripla is coming under some heavy fire because at $20,000 a dose -- $10,000 in some situations -- it's a heavy burden to bear. Cash-strapped states want Gilead to cut the price even more or they'll have to restrict access to the drug.

While Atripla is the preferred version right now, Gilead is working on a new formulation (Quad pill) that may work even better, and CAPS All-Star Health careGuy believes its superiority will boost Gilead's stock: "Playing for QUAD superiority vs Atripla in q3, could see 20% return in a short time with limited downside, if it is just non inferior."

There's no discussion yet on what pricing for Quad will be, but add Gilead to the Fool's free portfolio tracker and follow along on what, if any fallout there may be.

One-hit wonder?
Twitter processes something like 1 billion SMS messages every month, though for most users they'd never realize that TeleCommunication Systems was the one powering that technology. But TCS is more than just Twitter, and everyone from the Department of Defense to Cisco (Nasdaq: CSCO) has found need to use or partner with its technology. Cisco's program for Internet Routing in Space, or IRIS, uses TCS technology as the sole ground services partner.

TCS' recent first-quarter results showed flat revenues overall, though it found stronger service sales offsetting lower systems sales. And because of the lump nature of government contracts, things can get skewed at times.

TzingerToo rightly points out its government budget issues that can play havoc with TeleCommunication Systems results, but the need for secure communications hasn't lessened at all.

[Telecommunication Systems'] results in Q1 are low because of govt. budget problems. The need for secure communications is growing and both govt and commercial markets are growing. Signs of growth are there. It's easy to anticipate significant revenue growth by year-end. Stock trades today at 15 PE. By end of year stock will be above 6.00 without increase beyond current backlog.

Add TCS to your watchlist and see if it still communicates a growth opportunity for your portfolio.

Take a recess
Market downdrafts can wreck havoc on your portfolio, but there's no reason to hide your money in the mattress. These three recession fighters look to have the goods to keep your portfolio on the upswing, but it pays to start your research on these stocks on Motley Fool CAPS. Then weigh in with your own thoughts on which stocks you think can keep the dogs of recession at bay.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
GILD
$69.50 (-0.09%) $0.06
Dolby Laboratories, Inc. Stock Quote
Dolby Laboratories, Inc.
DLB
$87.06 (0.36%) $0.31
Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.32 (2.15%) $3.48
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$56.96 (1.30%) $0.73
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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