This is the first of two articles following from my original post entitled Stock Outlook: Capturing Upside While Bracing For Crisis.
Perhaps you believe that the U.S. economy is finally on the mend following Friday's strong headline employment number. On the other hand, perhaps you remain skeptical about the recovery with a close eye on the persistent instability in Europe. Regardless of your view, you're watching a stock market that has been steadily rising for over a month now. And while you likely want to participate, you also want to try to protect against the risk of any number of suddenly sharp downside shocks that continue to lurk under the surface and could rear their ugly head at any moment in time.
The following is a select list of stocks that boast the following characteristic: They are participating in the upside stock market movement and have demonstrated the repeated ability to fall by much less, if not even rise, during past periods of economic stress.
This select stock list was drawn from a universe containing the union of the S&P Composite 1500 Index and the S&P ADR Index, which includes the non-U.S. stocks in the S&P Global 1200 Index that trade as ADRs in the United States. This list was constructed using the following criteria:
- The stock has outperformed the broader market since the beginning of the Lehman crisis in mid September 2008 - the stock needs to demonstrate the ability to participate in market upside
- The stock held up much better than the broader market during each of the three major corrective phases since the beginning of the financial crisis in 2008 with a maximum sustained decline capped at -20% from peak to trough - the stock also needs to show the ability to protect against substantial loss
- A steadily growing dividend - the stock needs the ability to still generate a positive rate of return if the market moves into an extended net sideways pattern like we experienced in 2011.
Only 12 stocks out of 1,674 met the three criteria listed above. The 5 industrial stocks will be discussed here. The remaining 7 utilities stocks will come in my second article.
The following are the 5 crisis-resistant industrial stocks that are worth consideration for 2012.
The fast food giant needs little introduction. It has been a stellar performer since the beginning of the financial crisis, outperforming the broader market by a wide margin all along the way. During each of the three past crisis phases, McDonald's experienced maximum peak to trough price pullbacks of just -20%, -8% and -7%, respectively. And during the two most recent crisis phases, it had moved solidly into positive territory while the broader market was still trying to regain its footing. Despite this continuously strong performance, it is still trading essentially on par with its historical valuation and offers an attractive 2.8% dividend yield that has been growing at a double-digit annualized rate since the beginning of the crisis.
Click images to enlarge.
Family Dollar (NYSE:FDO)
Family Dollar is a major dollar discount retailer. The fact that the economically inferior goods provider performs well during times of crisis is not a surprise, as consumers look to trade down on their purchases in order to conserve resources. It has been a consistently strong performer during the entire crisis period. The only time it matched the market to the downside was during the latest crisis phase in August 2011. Otherwise, it has significantly outperformed during pullbacks. It boasts a 1.5% dividend yield that has been growing at a double-digit rate since the beginning of the crisis. As for valuation, the stock continues to trade at a meaningful discount to the low 20x earnings multiples it enjoyed prior to the crisis.
Both its chocolate and its stock are soothing during times of stress. Although its results pale to a degree relative to its peers on this list, it has still been an exceptional performer in its own right. After all, chocolate is one of the last things that consumers will cut from their budget during times of crisis. While the stock briefly dipped below the -20% line during the first phase of the crisis, it was a fleeting move. Otherwise, it has held up extremely well. At present, Hershey's stock trades at a 15% discount to its historical valuation, and it boasts a 2.3% dividend yield that has been growing at a mid-single-digit annualized rate since the beginning of the crisis.
Bristol-Myers Squibb (NYSE:BMY)
The big pharma company has certainly taken its share of lumps over the last decade. But it appears the tide has shifted in favor of the company's stock in recent years. It's major patent expirations in the coming year are well known, the new product pipeline shows promise and the company has done a respectable job in reshaping its business to raise cash and drive future growth. The stock continues to trade at an 8% discount to its recent historical valuation and offers a generous 4.2% dividend yield that is consistently growing and well protected by the mountain of cash that represents more than 10% of the entire company's market cap.
W.R. Berkley (NYSE:WRB)
A company from the financial sector (gasp) makes this elite list. W.R. Berkley is an insurance holding company focused on specialty commercial insurance products. The company is nimble and extremely well managed, showing the ability to identify niche opportunities and enter these markets to capitalize. And unlike many other insurers, their catastrophic risk is minimal and is more narrowly defined given the specialty characteristics of each of their product markets. The company has been growing its dividend at a double-digit annualized rate over the last several years. It does currently trade at a modest premium to its historical valuation, however, so some patience may be warranted in establishing a position at least for now.
These five stocks rank among the best since the beginning of the crisis in consistently generating shareholder wealth while at the same time defending against the negative shocks of crisis. Of course, past performance is no guarantee of future results, so it is possible that any of the five stocks above could break down during any future crisis driven pullbacks. But the fact that each has shown the propensity to hold up during each of the past three crisis episodes is notable and bodes well for what could be expected in the future, particularly since each continues to trade at reasonable valuations.
The final key associated with these five stocks just like all securities is identifying the right entry point. As a result, some may be attractive to purchase today depending on your approach, while others might warrant a degree of patience before establishing a position.
I will be following this article soon with the final post that will identify the specific utilities stocks that have demonstrated the same ability to repeatedly hold up well during periods of extreme market stress in recent years.
Disclosure: I am long MCD, FDO, BMY.
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.