By Jason Simpkins
In this article we conclude our series on bracing for a double-dip recession. In Part I of this investment series, we discussed ways investors could safeguard against the imminent decline of the U.S. dollar by buying gold. In Part II, we explored potential investments in foreign countries that have more stable economies and better growth prospects. And now, we're going to conclude by looking at "recession-proof" stocks right here in the United States.
To be clear, no stock is 100%-guaranteed to be recession-proof. What we're talking about are stocks that tend to benefit in times of economic uncertainty and discord. That includes low-cost retailers, utility companies, healthcare companies, and most of all, companies that pay dividends.
For instance, Wal-Mart Stores Inc. (NYSE:WMT), Family Dollar Stores Inc. (NYSE:FDO), Amgen Inc. (NASDAQ:AMGN), Celgene Corp. (NASDAQ:CELG), and Southwestern Energy Co. (NYSE:SWN), were some of the market's top performers in 2008. However, rather than concentrate on specific sectors, investors would be better served to consider buying stocks that have a long history of success, reliable dividend payouts, and global diversification.
Indeed, low-cost retailers and consumer staples companies are usually the safest bets in tough economic times, because consumers tend to cut back discretionary spending. Instead, they bargain hunt for the bare necessities - and investors should do the same.
Some 8.4 million jobs have been lost since the recession began in December 2007, and the national unemployment rate remained unchanged at 9.5% in July. The rate of joblessness was a boon for low-cost retailers like Wal-Mart, Family Dollar and Costco Wholesale Corp. (NASDAQ:COST). In fact, Wal-Mart and Family Dollar were among the highest rising stocks in 2008. WMT rose 15.63% that year and FDO surged 23.14% -- the biggest percentage gain among companies listed on the Standard & Poor's 500 Index.
Family Dollar has proven to be the biggest winner, as it's up more than 129% since Jan. 4, 2008. The stock has seen a huge surge in volume in recent weeks, as many analysts upgraded the holding in light of the deteriorating economy. As far as mid-cap stocks go, FDO has the fifth-most analyst upgrades in the past four weeks. The stock has surged 15% in that time. Family Dollar operates a chain of more than 6,600 discount retail outlets in 44 states. It sells food, clothing, and home products. The company on July 7 reported a 19% surge in earnings with sales rising 8.4% to $2 billion. Its stock has a price/earnings ratio of 17.44, and yields 1.42%.Conversely, shares of Wal-Mart have struggled lately, but analysts say that only makes them a more compelling buy. Wal-Mart stock is down more than 5% year-to-date, and recently hit a one-year low of $47.77."Wal-Mart under $50 is cheap," said Jeffrey Saut, chief investment strategist at Raymond James. "It's being valued like a grocery store even though 50% of its revenue comes from non-grocery items."
Wal-Mart reported a 3.6% rise in second-quarter net income, which climbed to $3.59 billion. The company also hiked its 2010 profit forecast, and on June 4 announced a new $15 billion share repurchase plan. Wal-Mart also is a global brand, which means it's not entirely reliant on the U.S. consumer. Wal-Mart currently operates in 15 countries, with just under half of its 8,300 stores located outside of the United States. International sales last year topped $100 billion for the first time ever, rising to about one-quarter of the company's gross intake. And while U.S. same-store sales have declined this year, global sales are up. International sales rose 11% to $25.9 billion in the second quarter after jumping 8.9% in the first three months of the year.
Deutsche Bank (NYSE:DB) Securities senior analyst Bill Breher, who attended a shareholder meeting, told the New York Times that Wal-Mart's international sales would eventually surpass its domestic intake. "We expect Wal-Mart will eventually be as big in China as they are in the U.S. now, and grow double-digit annual sales increases in Latin America," he said. Deutsche Bank AG maintains a "Buy" rating and a $66 price target on Wal-Mart shares. Deutsche Bank said in a research note:
After hearing from all lines of business, we continue to believe Walmart is one of the best positioned retailers for this environment," Deutsche Bank said in a research note. Managmt continues to see real opportunities to grow sales, aside from the emerging benefit of food inflation... We recommend purchase of WMT shares given the company's very strong competitive positioning in a still-challenging consumer-spending environment.
Stick to Staples
If a double-dip recession does become a reality U.S. consumers will increasingly turn to discount retailers to cut costs. But they'll also buy fewer products, cutting back on luxury purchases in favor of the bare necessities. The S&P 500 has lost an average of 21% during the past 10 recessions - excluding the current "Great Recession." However, the average consumer staples stock lost just 2.4%. So it wouldn't be a bad idea to build a firm stake in notable consumer staples companies.
Johnson & Johnson (NYSE:JNJ) and General Mills Inc. (NYSE:GIS) are two good candidates. General Mills is up 21% since the start of 2008. Johnson & Johnson is down about 13% in that time but still ahead of the S&P 500, which is down 27%.
Both pay sizeable dividends with GIS yielding 3.2% and JNJ yielding 3.7%. "JNJ has a sound business model that emphasizes the development and marketing of top quality drugs and benchmark consumer products," says Money Morning Contributing Editor Horacio Marquez. "Its strong and stable profit margins - with gross profit north of 70% - and its consistent growth over more than a century are matched by only a handful of companies."
JNJ has suffered through a spate of product recalls lately, but the company has been around for more than a century and it isn't going anywhere anytime time soon. The company reported revenues of $3.4 billion in the second quarter, a 5.4% increase compared to the same period in 2009. Like Wal-Mart, JNJ benefited from strong international sales growth. Domestic sales declined 2.8%, while international sales increased 4.1%. That will bode well for the company should the dollar become weaker and its products less expensive in foreign countries.
"I believe that 2010 will bring a 7% sales increase as sales and profits will be helped by the weak dollar, which will give sales abroad a boost," says Marquez. Marquez also likes General Mills, a company that reported a 1% increase in its fiscal-2010 profit. General Mills earned $14.8 billion for the year with diluted earnings per share (EPS) growing 16% to $2.30. The company expects EPS to increase by 7-8% in fiscal 2011 to approximately $2.46 to $2.48.
General Mills has operations in 130 markets around the world, which means it is less reliant on the U.S. economy than in the past. The company's successful brands like Cheerios and Haagen-Dazs have been introduced to some 35 emerging markets. And General Mills has some 150 new products that it intends to launch globally. Marquez believes:
With strong, stable margins and global sales growth, General Mills has rapidly increased its cashflow. And that allows for all sorts of nice things for investors, including the possibility that the company will increase its very safe 3.2% dividend yield, buy back its own stock, or even acquire a less capitalized brand at a discount.
As Americans cut back on spending they're likely to dine out less. But when they do eat out, they'll find less expensive food more appealing. That means more business for fast-food kingpins McDonald's Corp. (NYSE:MCD) and Yum! Brands Inc. (NYSE:YUM).
McDonald's has proven to be an especially resilient restaurant, and it continues to hold the edge over Yum! in the United States. U.S. same-store sales surged 5.2% in the second quarter and U.S. revenue rose 2% to $2.08 billion. Operating income climbed 7% to $895.1 million, and total revenue rose 5% to $5.92 billion. International sales have also been kind to the Golden Arches. Second-quarter same-store sales grew 5.2% in Europe and 4.6% in Asia, the Middle East, and Africa.
China alone accounts for nearly a quarter of McDonald's revenue from the Asia Pacific, Middle East and Africa region, and its share is growing, Tim Fenton, the president of McDonald's Asia Pacific, Middle East and Africa operations told the Wall Street Journal:
China is our fastest-growing [market] from the income standpoint and from the revenue standpoint. The informal eating-out industry in China is about $300 billion right now, and it will grow about 10% this year. McDonald's stock has reflected this success by surging more than 30% in the past year.
Yum!, meanwhile, has struggled in the United States. Its U.S. same-store sales actually fell 1% in the second quarter, dragged down by KFC's 7% decline. The company's total revenue came in at $2.57 billion. Still, it has the stronger presence in Asia. Yum - which opens one new KFC in mainland China almost every day - has more than 3,500 restaurants in 650 Chinese cities. In the second quarter alone, the company opened 59 restaurants in China, bringing the total for this year to 155 outlets. Yum's China sales rose 4% in the second quarter. Its stock is up nearly 20% in the past year.
The aforementioned companies have strong brand names, reliable dividend payouts, and international diversification that will serve their investors well if the U.S. economy backslides into recession. Investors may also choose to look at pharmaceuticals, utilities, and so-called "sin stocks," which also tend to perform well in recessions. But be advised these areas are traditionally more volatile and less reliable.
Pharmaceutical companies, for instance, face uncertainty regarding President Obama's recently passed healthcare reform legislation. Many pharmaceutical companies are being confronted with expiring patents on their best-selling drugs and rising generic competition. Sin stocks are also dangerous, and not just to your health. When policymakers are faced with budgetary constraints and forced to raise taxes, these companies are usually the first to be hit. Still, if you feel inclined to gamble you might look at either of the following:
- Celgene Corp. (CELG): Celgene, which has been powered by sales of its blood cancer drugs, last month posted better-than-expected second-quarter earnings and raised its forecast for the year on strong sales of its cancer drug Revlimid. Sales of Revlimid, the company's most important drug, rose 48% to $587 million, and the company's second-quarter net income rose to $155 million, or 33 cents a share, from $143 million, or 31 cents a share, a year ago. Celgene in June agreed to acquire Abraxis BioScience Inc. in a bid to expand into drugs that treat solid tumors. Morgan Joseph rates the stock a "Buy."
- Altria Group Inc. (NYSE:MO): Altria is a holding company whose wholly owned subsidiaries include Philip Morris U.S.A. Inc. (NYSE:PM). If tough economic times do increase smoking in the United States, then Altria will benefit. By proxy, that could also benefit Celgene, whose Abraxane is used to treat solid tumor malignancies, such as lung cancer.