3 Cheap Stocks Already Priced for a Recession

Includes: CAT, DOW, XOM
by: Convex Strategies

Is a recession, as defined by two consecutive quarters of negative GDP growth, going to be that much different than the last couple years of sluggish, slow, and painful growth? Probably not, and considering the massive cushion of cash, and record profits already being made by many companies (thanks to strong demand from developing markets), it would be a recession unlike the last one.

Here are three cheap, great stocks, already priced for a possible recession:

Caterpillar (NYSE:CAT)
: Now trading at 8.5 times next years projected earnings, the stock looks particularly cheap when you consider its exposure to developing markets. While roughly 60% of their revenues come from North America and the EU, 40% comes from emerging, rapidly growing markets that are likely to continue their pace regardless of our own economic prospects. Caterpillar hit a high of $116.00 earlier this year, and the heavy selling its share price has experienced recently has significantly reduced the risk involved with entering this stock. Farmers are still doing exceptionally well due to food prices which have remained high, so they are willing to continue to invest in new equipment for their farmland. Considering the inflation potential and excess liquidity, plenty of money will stay in food prices. If we do in fact go into a "real" recession, Caterpillar's estimates may experience further cuts, but I'd be surprised to see real hurt in their earnings.

ExxonMobil (NYSE:XOM): Energy investors seem to be ignoring the fact that oil is currently at the perfect price for those selling it. At about $85, companies like Exxon can make massive profits without suffering from demand destruction. Oil prices have remained outrageously high, (though cheaper than the $115 we saw earlier this year) and will likely stay here as inflation remains relatively high. Additionally, oil prices have soared since bottoming in 2009, despite a real drop in unemployment or improvement in the overall macro-economy. Rather than being priced for a recession, Exxon and its peers appear priced for 50-60 dollar oil. Exxon is the best play in the large integrated energy space right now as it has been hit a bit harder than its peers (NYSE:COP) and (NYSE:CVX), although the other two have better yields for those who desire more income.

Dow Chemical (NYSE:DOW): Dow is a diversified chemicals company that has enjoyed near record earnings and revenues this year, while substantially improving their balance sheet. The stock looks downright cheap on a valuation basis, trading at 7.4 times next year's earnings, and 9 times this year's earnings. Slow growth or no growth, Dow seems to be able to just keep pushing through. Dow has been blowing through analyst estimates. After their Rohm and Haas acquisition during the recession, they have strategically been paying down debt, thus significantly strengthening their balance sheet. Their R&H purchase was a move into specialty chemicals, which they believe exposes them to a recession proof segment of operations. It's no secret that sooner or later, overall economic growth in developed nations is going to have to pick up for any company with exposure to them, but for now, Dow can depend on emerging markets to strengthen their bottom line. The current 3.8% dividend yield is very solid as well.

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