5 Stocks to Buy Regardless of Economic Status: Part 3

 |  Includes: ABEV, BUD, PM, RAI, VGR
by: Brian Nichols

Click here for part 2 of this series.

In part 3 of my series on stocks to buy regardless of economic status I believe that I have found the best industries in which to invest. I must say, that my other picks were good but these picks are much better in a sense of seeing profit during an economy with more questions than answers.

Retail can slow in a bad economy, cell phones can be cut off to save money, consumers may stop dining out if the economy gets to bad, but tobacco and alcohol will always be enjoyed by its loyal customers. I am a firm believer that this downtrend is more related to panic versus fundamental reasoning but I also believe we will experience more loss before it gets better,

I do not believe we will experience another recession, such as 2008, but I do expect to see more losses. Some investors have forgotten how long it took for the Dow Jones index to reach 6600 points. It did not happen over a period of weeks, it took 17 months from the markets initial downtrend to reach 6600 points on the Dow Jones index.

Below is a chart of the Dow Jones index Industrial Average and its pattern from 10/12/2007 until 03/06/2009:

10/12/07 = 14093
11/23/07 = 12980
12/07/07 = 13625
01/18/08 = 12099
02/01/08 = 12743
03/07/08 = 11893
05/02/08 = 13058
07/11/08 = 11100
08/08/08 = 11734
10/24/08 = 8378
10/31/08 = 9325
03/06/09 = 6626
Click to enlarge

The recession took place over a long period of time with various periods of false hope. The market would almost always rise substantially after a big dip. However, the drops were always larger and highs were always lower. Since April, the Dow Jones index has seen a similar trend with two high and two low periods, and lows were greater each time. As I said, I do not believe we are going to endure another recession, similar to 2008, but we could experience more downtrends before recovering.

I do not see another recession because the markets are much stronger than in 2008. In 2008 there was a serious financial crisis; the banks, automobile industry, and consumer spending all tanked while gas prices increased. It was a complete mess, and I do not expect a similar pattern, as areas that were weak in 2008 are now much stronger. However, we have problems such as high debt, a lower credit rating, high unemployment, and low consumer sentiment, that could push our markets lower until the issues are resolved. Below are stocks that I consider to be safe picks for long term holds until the market begins to recover.

Tobacco sales stay the same or keep rising higher regardless of the economy. Reports are released every month that show sales in certain areas of the economy declining yet tobacco sales keep rolling forward. The government has continued to increase taxes, limit marketing, and put labels on every product which basically say you will get cancer if you use this product. Yet sales are not affected and tobacco companies continue to remain profitable.

I can not think of any other company that would excel if put in the same situation as the tobacco industry. This proves the industry as a whole is resilient and strong. Below are three companies that I consider to be among the strongest within the industry that investors should consider buying.

Reynolds American, Inc. (NYSE:RAI) stock doubled over a two year span from May of 2009 until May of 2011. The stock was trading at an all time high of $39.87 before experiencing a downtrend which lowered the price to $32.47. The stock has since began trending higher and is now trading at $35.49 as the stock posted a gain on Thursday when the Dow Jones index lost nearly 4%.

The company is large with a market cap of $20 billion but could grow larger. It trades with a price to earnings of 15.43 and a dividend yield of 5.97%. Both the income statements and balance sheets have remained consistent over the last 6 years. I can not find anything that I do not like about this stock.

The price to earnings is low, the dividend is among the best, and the stock is trending higher when every other stock is trending lower. I am on the Reynolds American bandwagon and believe that a purchase at its current price will provide long term gains in both price and from dividends.

Phillip Morris International (NYSE:PM) has seen a 5 day gain of 4.5% when most stocks have seen a loss. The company was trading at all time highs during the last month at a price of $72.74. The stock is trading at $68.50 as the stock slid with the market but has now recovered.

Phillip Morris is the largest tobacco company in the market with a cap over $120 billion. It trades with a price to earnings of 15.68 and pays a dividend yield of 3.74%. The company has consistently posted gains in revenue and earnings per share with 2010 seeing the most in gains. The balance sheet reflects more debt than I typically like to see in a company but with PM I can make an exception.

I believe the stock will continue to see gains from this point forward. It is on track to post another year of increased revenue and earnings which demonstrate its growth. This company has proven itself to stand alone against the market with investors who do not react to panic. Regardless of the markets future direction I expect the stock to continue seeing gains from stock price and dividends.

Vector Group (NYSE:VGR) has traded in a tight range over the last 52 weeks with $4.50 separating the high and low. The stock is now trading at $18.40 seeing a gain of nearly 3% over the last 5 days.

The company has posted revenue that has significantly improved over the last three years with EPS seeing record gains in 2010. The company has debt over 50% of its assets which is much higher than I typically like to see because it can cause issues later in the company's future. The company is much smaller than the previous two with a market cap of only $1.39 billion.

It has already demonstrated growth which makes me more comfortable with the debt as I am confident in the company's ability to pay off its debt in the future. The company's lack of price action and increased financial numbers are obviously strong buying points but its dividend sets the company apart from others.

Vector Group trades with a dividend yield of 8.70%, the best within its industry. I believe the company is sure to grow over the next 3 years, with revenue growing at a rapid rate investors can benefit from the company's high dividend seeing more gains.

The next two stocks come from the alcoholic beverages industry. Along with tobacco this industry has proven itself resilient, compiled with stocks that trend against the market. Below are two within the industry that I expect to continue seeing gains.

Anheuser-Busch (NYSE:BUD) trades with a market cap of $87.79 billion a price of $54.69. The stock trades with a price to earnings of 19.49 after seeing gains of more than 6% during the last 5 days. Financials have improved across the board with revenue and EPS seeing considerable gains during the last 5 years.

The company has also shown action in attacking its debt by reporting less debt over the last 3 years. BUD trades with a yield of 2.16% and is currently $10 off its 52 week high. The company is on pace to see a record financial year therefore with a buying opportunity $10 away from its high and a dividend for security the opportunity seems to good to pass up.

Companhia de Bebidas das Americas (ABV) is a Brazilian beer company that offers a great opportunity for gains within the market. The company has posted more than 7% in gains during the last 5 days along with yearly gains in excess of 45%. The growth within this company has been consistent and aggressive as the company's financials have improved across the board.

Revenue and EPS have dramatically increased over the last 5 years along with the company lowering its debt to assets during the last 3 years. The company is on pace to post yet another year of impressive gains and with a yield of 4.47%, for security, the company offers one of the best situations within this volatile market.

Most companies within these two sectors have outperformed the overall market:

Time Tobacco Alcohol S&P
5 day +2.85 +5.20 -2.73
1 month -1.61 -0.81 -12.61
YTD +10.32 -0.81 -10.46
Click to enlarge

The above graph shows the performance of the Tobacco and Alcohol industries compared with the S&P 500 at different times. Both sectors have significantly outperformed the S&P during the last 8 months. I believe these stocks will continue to outperform the S&P 500 as each offer solid dividends along with strong potential for continued growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VGR, ABV over the next 72 hours.