With the Dow nearing the 13,000 mark again, but the threat of a recession still present, it would do investors well to consider the impact a renewed downturn might have on our 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 might 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 nevertheless been reporting strong revenue and earnings growth over the past few years. With a beta of one 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 PE 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) |
3-Yr Avg. Beta |
3-Yr Avg. Rev. Growth |
3-Yr. Avg. EPS Growth |
PE Ratio |
|---|---|---|---|---|---|
| CF Industries (NYSE: CF) |
***** |
0.7 |
19% |
16% |
8.1 |
| CPFL Energy (NYSE: CPL) |
***** |
0.7 |
15% |
25% |
11.9 |
Source: Motley Fool CAPS Screener.
The long-term view
Investors have an abiding belief in the saying "People have to eat, so farmers will need fertilizer." But like crops, all things have their season, and macro events can and do influence supply and demand.
Last year as commodities soared, fertilizer companies boosted production to capture more profits leading to a surfeit of nitrogen and potash on the market. That caused prices to fall -- and the market values of fertilizer producers to decline. The current environment, however, is likely to see those trends reverse as corn in particular enjoys strong demand, meaning prices will stay high. Nitrogen producer CF Industries estimates U.S. farmers will plant 93.5 million acres of corn this year, up 1.6 million acres from 2011.
The U.S. corn belt is a key region for Terra Nitrogen (NYSE: TNH) and CVR Partners (NYSE: UAN), both leading nitrogen producers, so the trend bodes well for them too. But it's doubly so for CF as it also transports ammonia from its Donaldsonville facility to the U.S. corn belt. CF's recent earnings report showed its ammonia plants were operating at 100% capacity in the quarter, much as they had been throughout the year.
Last month CAPS member dreamjob anticipated the good earnings report, noting CF has proven itself capable at generating excess cash.
Management is generating cash for the owners of this company, and cash returns on investments are very good. Earnings quality is solid (FCF outpacing NI), and sales and earnings are growing very nicely (earnings is actually growing faster than sales).
Add the fertilizer giant to the Fool's free, personalized stock-tracking service and tell us on the CF Industries CAPS page if you think it will enjoy a bumper crop of profits in the coming year.
Blowing in the wind
Earlier this month, carbon-fiber maker Zoltek (Nasdaq: ZOLT) reported sales to wind turbine companies elevated revenues 50% last quarter, but it's likely the wind-energy business in the U.S. is about to enter the doldrums.
Extension of the tax credit used to keep the alternate form of energy on par with other fuels will likely die this year, and the second-largest wind power firm in the U.S., Iberdrola Renewables, says it won't commit to projects beyond 2012 since the credits count only towards those that come online this year. While that suggests a gust in production by year's end as companies pull projects forward to beat the deadline, the longer term outlook is cloudy.
Brazil, however, is expecting an eightfold increase in wind power capacity by 2014. With business booming, Brazilians will be using more electricity, which bodes well for one of the country's largest utilities, CPFL Energia. It is investing heavily in wind power, having just purchased 120 megawatts of wind farms in Rio Grande do Sul state.
Many investors are also attracted to the utility because of its dividend, which currently yields 5.1%. All but one of the 189 CAPS All-Stars weighing in on CPFL believe it will outperform the broad indexes, so you might want to follow along to see whether the utility can keep the wind at its back by adding it to your Watchlist.
Take a recess
Market downdrafts can wreak havoc on your portfolio, but there's no reason to hide your money in the mattress. The Motley Fool has uncovered one stock that will be the breakout champ due to the coming spike in oil prices. Check out The Motley Fool's free report, "The Only Energy Stock You'll Ever Need." Get access to detailed analysis of these two companies -- it's completely free.
