In early September, Kapitall reported the odds of the U.S. falling into a double-dip recession reached 50%, but the tides appear to be turning as Goldman Sachs put the 2012 recession probability at 40%.
Goldman's Chief economist, Jan Hatzius, says unemployment in the U.S. and pressures in Europe play a significant role in determining if a recession is under way. However the total economic damage from the European financial crisis is largely incalculable because the potential spillover is difficult to quantify. Hatzius also places the unemployment rate to the mid 9% range in 2012.
"Ultimately, it's a judgment call," Hatzius said during a conference call. "We're basically indicating that we think the risk is sizeable and elevated, especially given the already under way deterioration in the labor market, although it's a gradual one. Historically, U.S. business cycles have been quite vulnerable to rising unemployment and deteriorating dynamics in the labor market." (via CNBC)
The silver lining to a potential recession, says Hatzius, is that the cyclical parts of the economy that tend to suffer the most during recession have already taken their beating. If the recession happens, then there isn't much greater damage that could be inflicted, meaning the recession could be less impactful and quicker to pass than many anticipate.
Ultimately, as judged by Goldman, the economy is not forecasted to decline, but to recover at a snail's pace. Of course, the fragility makes it apt to move in either direction.
"The obvious risk with our (non-recession) forecast is that the slowdown in growth and the associated deterioration in the labor market is going to start feeding on itself and pushes the economy into recession via the stall-speed dynamic," said Hatzius.
So what if Goldman Sachs is wrong ,and the probability of a 2012 recession is much higher?
To help protect you from such a scenario, we went back into time and identified a list of stocks that outperformed the market during each of the last three big market downturns over the last decade (between 10/01/2007-03/02/2009, 04/19/2010-06/28/2010, and 07/18/2011 to the present day).
For each stock we'll list the alpha, i.e., outperformance, relative to the S&P500 index, a benchmark for our analysis.
In addition, all of these stocks appear to be undervalued relative to levered free cash flow and earnings projections.
Considering their track record during market downturns, and their current valuations, do you think these stocks are worn a closer look?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Mediware Information Systems
Levered free cash flow at $7.27M vs. enterprise value at $61.54M (implies a LFCF/EV ratio at 11.81%). The EPS estimate for the company's current year increased from 0.65 to 0.75 over the last 30 days, an increase of 15.38%.
This increase came during a time when the stock price changed by -6.2% (from 12.25 to 11.49 over the last 30 days).
2. Arch Capital Group
Levered free cash flow at $527.50M vs. enterprise value at $4.01B (implies a LFCF/EV ratio at 13.15%). The EPS estimate for the company's current year increased from 1.93 to 1.95 over the last 30 days, an increase of 1.04%.
This increase came during a time when the stock price changed by -2.87% (from 32.7 to 31.76 over the last 30 days).
3. Lockheed Martin
Levered free cash flow at $2.58B vs. enterprise value at $25.22B (implies a LFCF/EV ratio at 10.23%). The EPS estimate for the company's current year increased from 7.49 to 7.51 over the last 30 days, an increase of 0.27%.
This increase came during a time when the stock price changed by 0.06% (from 71.22 to 71.26 over the last 30 days).
4. PS Business Parks
Levered free cash flow at $142.01M vs. enterprise value at $1.33B (implies a LFCF/EV ratio at 10.68%). The EPS estimate for the company's current year increased from 4.54 to 4.55 over the last 30 days, an increase of 0.22%.
This increase came during a time when the stock price changed by -8.65% (from 51.22 to 46.79 over the last 30 days).
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Data sourced from Yahoo Finance and Finviz.
The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.