3 Stocks to Beat a Recession

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 proved to be less volatile than the market but have been reporting strong revenue and earnings growth over the past few years. With a beta of 1 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 are a handful of stocks that look like they could do well in any extended downturn.

Source: Motley Fool CAPS.

Avoiding catastrophe
Expect insurers and reinsurers to report earnings reflecting the extraordinary number of natural, catastrophic events that occurred in the first half of the year, from the major earthquakes in Christchurch, New Zealand, and the Japanese earthquake and tsunami to the tornadoes and flooding that have ripped across the United States.

Berkshire Hathaway (NYSE: BRK-B) isn't a reinsurer in the main, with its diverse line of businesses, but its first-quarter results were still hit by Japan's disaster as it took a $1.7 billion charge for catastrophe losses. Montpelier Re (NYSE: MRH) and Everest Re also saw the first-quarter events sap profits.

But not all reinsurers are created equal, such as Maiden Holdings, which focuses on non-catastrophic products for insurers and reinsurers. It expects that its total exposure to second-quarter disasters will be less than $10 million. While others might benefit from an improved pricing environment come 2012 if we get hurricane-related damages in the second half of the year, Maiden prefers to concentrate its operations on less volatile scenarios and thus classifies itself as a steady performer.

CAPS member cbcon2 would probably agree, believing short sellers might be lumping Maiden in with the other reinsurers: "The numbers are good enough to withstand the current short interest. A great company."

Let us know on the Maiden Holdings CAPS page whether you think there's a stormy relationship brewing, but at a minimum you should keep a close eye on the reinsurer over the next couple of weeks as all the quarterly data pours in.

Keeping the bugs out
According to a study by Juniper Networks, 90% of businesses have suffered security breaches, and more than half of them have had at least two. A number of recent high-profile hacking attacks will create opportunities for well-known industry players Checkpoint Software, Fortinet (Nasdaq: FTNT), and Blue Coat Systems, but there are other niche names that should profit, too, and investors would do well to consider them as well.

NCI in particular should profit from having the government take a more proactive role in protecting state secrets. When even the CIA and FBI have their websites hacked, it means cyber-security won't be getting gutted along with the rest of the defense budget. NCI estimates that IT-focused security spending by the Defense Department will grow from $31 billion in 2010 to nearly $40 billion by the end of 2015.

The contractor has put together a string of government contract wins lately, including one for $58 million for a computer engineering contract with the U.S. Army along with a $26 million contract for the Air National Guard. The risk, though, is that NCI relies solely on government contracts for its revenues, with 88% of revenues last year coming as a government prime contractor. Funding can always be cut or switched out to other contractors.

With 96% of the CAPS members rating NCI believing that it will outperform the broad market averages, it appears they don't expect NCI to be playing defense in the long run. Add the contractor to the Fool's free portfolio tracker to follow along on how well it prepares our nation's defense.

Test for success
Shares of specialty medical-testing company Bio-Reference Labs wilted in the summer heat, dropping more than 20% from recent highs. Its quarterly results came in better than expected in May, causing an initial surge, but the markets have since thought better of it and peeled back their gains.

Considering that the lab has grown top-line revenue by better than 23% annually for the past five years, and industry giants LabCorp and Quest Diagnostics (NYSE: DGX) have lost share to it, Bio-Reference increasingly looks like a prime target for an acquisition. Even its second-quarter results showed revenues up 25% on a 23% jump in patient counts.

CAPS member shamapant thinks that kind of consistency will reward shareholders over the long haul: "Consistent Returns show management strength, growing EPS and Sales, high inventory turnover. I missed it back in march so now looks like a great time to get that pick I wanted so badly."

If you're interested in learning whether Bio-Reference Labs will test new highs, add the stock to your watchlist to get all the Foolish news and analysis about it.

Take a recess
Market downdrafts can wreck havoc on your portfolio, but there's no reason to hide your money under 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.