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(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

As much as mainstream investors like to shy away from them and regard them as crazies, there's a niche community of survivalists out there who are busy preparing and training for The End Of The World As We Know It (TEOTWAWKI in survivalist lingo). This is an imagined time in the future when the division of labor, that which is the basis of the entire global economy, breaks down. Survivalists are generally regarded as fringe members of society, though while a bit out there, they have invested much thought, time, and a significant portion of their incomes considering and preparing for the ultimate Black Swan. We can always look at them and laugh, but there are indeed ways to think and invest like a survivalist without "going off the deep end" so to speak. In this article I will try to show how a mainstream investor can diversify a portfolio by adopting the core of survivalism, without necessarily building a nuclear fallout shelter deep within the Earth's crust. In the end, it may behoove us all to set aside a small portion of our 'regular' portfolio to better diversify against the unthinkable.

Bullets, Beans, and Band-Aids for the Everyday Retail Investor

Looking deeper into the philosophy of a survivalist yields some interesting investment diversification considerations. According to James Rawles, founder of survivalblog.com, before dealing with financial investments, you need to first square away your basic physical needs. These basic needs are divided into three categories: bullets, beans, and band-aids. 'Bullets' being protection, 'beans' being food and water, and 'band-aids' being medicine and first-aid. The survivalist reasons: what's the point of having a room full of gold bars if you and your children are hungry? Have beans. And what's the point of having food and water if you're too sick to eat it? Have Band-Aids. And lastly, what's the point of having all of this food and medicine if someone takes it all away from you? Have bullets. Once you've squared away your bullets, beans, and Band-Aids, you can then invest in tangible wealth, like physical gold and silver. That's survivalism 101.

The everyday retail investor can survivalize his portfolio by using the bullets, beans, and Band-Aids approach itself with comparably safe securities.

Bullets

As survivalists say, when there are riots in the streets and zombies are busting down doors, guns and ammunition will be in short supply. In more level-headed lingo, if things get rough, gun companies will do well. In fact, they already are. Today, gun companies sell guns as fast as they can make them - quite literally. Their bottleneck is in the manufacturing of the firearms, not in the demand or the sales channels. With only a few weeks left in the year, 2013 is set to break all records for gun sales. Can you imagine being in a sector in which your only constraint on making money is being able to make enough product? There are some counterintuitive reasons for this. One is actually gun control. The more political clamor there is for tougher gun control laws, gun owners and those interested in becoming gun owners go on buying sprees in fear that tougher gun control laws will prevent them from owning a firearm, or else make them prohibitively expensive.

There are currently two publicly traded firearm manufacturers - Smith & Wesson (NASDAQ:SWHC) and Sturm, Ruger & Co. (NYSE:RGR) - whose only difficult decisions these days seem to be what to spend profits on: Capital expenditures (like buying more machines to make more guns) or pocket the cash as dividends to shareholders. Both of these companies are showing spectacular growth, especially in the last two years. Smith & Wesson went from an $83M loss in 2011 to a $79M profit this year. The larger of the two, Ruger, has a larger profit margin, is on track for higher sales this year, and pays out dividends (3.8% yield). Its one-year stock price has risen over 60%, yet still has a healthy P/E ratio of 13.5. Earnings growth for Ruger has likewise been explosive, from $28M in 2010 to $71M in 2012. Earnings are on track to easily top $100M this year. Ruger has vastly outperformed Smith & Wesson since September, though SWHC has regained some of that ground over the last month.


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Some may suggest handling your 'bullets' part of this diversification project by investing in larger bullets (like bombs and missiles) - the kind Boeing and Lockheed Martin make. But as the survivalist believes, when the zombies are knocking, F-35 orders will be light, yet pump-action shotguns will be the weapon of choice. If you're into thinking like a survivalist, stick with small-arms manufacturers.

What about investing in actual ammunition manufacturers? That would seem to be a logical nomination for our 'bullets' category, but I would disagree. Ammunition is a relatively low barrier-to-entry industry and a more dangerous pick than recognized and established gun manufacturers.

Beans

The next category of survivalist diversification is 'beans'. How will the world feed itself as things go downhill? Survivalists say that people should gather and store food, but also learn how to prepare and grow food on their own. To that end we can supplement our survival portfolio with Sysco (NYSE:SYY), the #1 food supplier worldwide. Sysco has a very strong and healthy presence in the marketplace, and it is currently trying to purchase USFoods, the #2 food supplier. The deal has reportedly been agreed upon, but surprises could still come. We'll have to wait and see if the FTC will allow the merger with regards to antitrust, but if it goes through, Sysco is poised to dominate the world food supply arena. And if it doesn't go through, it will still remain a healthy dominant food services company, but its share price will undoubtedly dip on the news. I would bet on the FTC throwing some kind of wrench in the deal somewhere, as government generally enjoys imposing itself wherever it can on the private economy, but an option straddle timed for the release of the FTC decision (whenever that may be) could work nicely. Afterwards, buy on any dips caused by negative news here.

SYY is currently slightly overpriced on the news of the potential merger (P/E of 21), but it is a nice long-term healthy company, and also pays out dividends regularly with a current yield of 3.2.

To shore up the food production side, Deere & Co. (NYSE:DE) makes farm construction and food growing possible with its iconic farming equipment and machinery. DE stock has basically gone unchanged since the beginning of 2011, though share price can be very volatile during recessions and recoveries. See 2008-2010, when the stock went on a crazy roller coaster. It is better as a consistent income pick if you're willing to stomach heavy swings in principle. Its dividend yield is 2.3, and EPS a whopping 9.08. I would recommend this powerhouse of an anchor for any income-based diversification effort, and with a P/E ratio of 9.6, it is on the very low end of the spectrum.

For the final beans consideration, what do farmers use together with their John Deere tractors? They need consumables, such as seeds, fertilizers, and pesticides. The hands-down world leader in this arena is Monsanto Company (NYSE:MON) who destroys the market with sales of almost $15 billion. Its stock has been rising consistently over the past few years all the while paying dividends with a yield of 1.5. The only hesitation I have with Monsanto is that it is selling currently at quite a premium, having a P/E of 24.

A similar play in the seed arena is MON's Chinese counterpart, Agria Corp. (NYSE:GRO), also appropriate if you are in the Jim Rogers camp of agriculture and China investing. While GRO is selling a gaggle of seeds (FY2013 Revenue was almost 6 billion yuan / $1 billion), its profit margin does need to grow. I include it here as a higher risk higher return play because Agria may have a short term spike soon. Its most recent loss of $184M came in the face of record gross profit margins and near record sales due to $202M of goodwill impairment. Essentially, excluding goodwill impairment, the company was profitable to the tune of $18M. If it can pull a similar profit and show it on its statement this time, GRO is poised for a good-sized spike.

Band-Aids

There is one company that stands out when talking about diversifying into first-aid and medicine for our survivalist portfolio: actual Band-Aid company Johnson & Johnson (NYSE:JNJ). JNJ also sells the over-the-counter medication champion, Tylenol. Besides being a stable component of the Dow Jones Industrial Average, JNJ's stock price appreciated 30% this past year, and also touts a decent dividend yield of 3. It has a normal P/E ratio of 17, and also has a very impressive debt/equity ratio of 25%. With JNJ, and you won't only have a good 'Band-Aid' hedge, you'll also have an impeccable addition to any type of investment portfolio.

Gold

Now that we've addressed the three main categories of hedging our portfolio with Survivalism, it's time to discuss gold. Sure, you can add actual gold funds to your portfolio such as SPDR Gold ETF (NYSEARCA:GLD) or the major gold (and copper) mining company Freeport-McMoRan (NYSE:FCX). But that captures the price of gold itself, and does not capture the survivalist mentality behind owning physical gold. The point of having actual gold (or silver) in your hands is to diversify yourself against the devaluation of the US Dollar (and all currencies, for that matter). With $85B of those being printed every month and other fiat currencies being printed even harder by central banks throughout the world with no signs of any significant tapering, that value could plummet at any time, and you don't need to be a survivalist to be genuinely worried about that.

Bearish sentiment on gold has reached extremes not yet seen since the larger gold bull began in 2000. Gold has been in a downtrend because the price inflation everyone expected has not yet developed. But when it does, gold is poised to rocket off once again. For bottom pickers, any move below $1100 should be bought aggressively, and don't forget to watch the dollar ETF, UUP. If that goes below $21, the dollar index could begin a serious waterfall decline. Almost all the Fed printed money is still stuck in excess reserves which are at record highs and still climbing. Almost none of it has gone into circulation yet, which is why inflation hasn't shown up yet in the CPI all that much. But it will.

As for a how survivalist handles gold buying, he counts how many ounces he has, not how many dollars they represent. To buy gold the survivalist way, forget about the price in dollars. Just set aside a fixed amount of paper money every month and trade in for some hard specie, however much it can get you.

Now your portfolio has been "survivalized" by adding bullets, beans, and band-aids. Back it up with precious metal, and you'll be ready for the apocalypse, or otherwise simply have a healthy diversified portfolio for the future, whatever it may bring. The way you look at it is up to you.

Source: How To Invest Like A Level-Headed Survivalist