By Brian Tracz
The October lows of 2011 and the Great Recession have provided two times of financial turmoil by which to judge how well a company withstands adversity. During "bad weather" market environments, multiple companies see their shares suffer in a highly correlated fashion. A special few, marked with relatively inelastic yearly sales, strong balance sheets, and significant dividend yields, are good options for investors seeking less price fluctuation and greater short-term returns.
So you want to avoid assembling a portfolio that risks tanking all at once. As some wrongly think, it is not sufficient to simply have a sector-weighted "diverse" portfolio. In my suggestions below, I took beta into consideration, among other things, because I want stocks with low levels of covariance in respect to the wider market. Well-summarized in an interview on Bloomberg television, Ray Dalio's overall investment strategy (what he calls the "Holy Grail") hinges on a simple fact: if you can amass a portfolio with 15 uncorrelated bets (i.e. bets with low covariance)--15 bets that produce income in a relatively independent way--then you will be a winning investor (view Dalio's portfolio here). Keep in mind that, to beat bad-weather markets, you need stocks that correlate neither (1) with the market nor (2) with each other--that's alpha-investing!
Republic Services (RSG) roughly tracks the S&P 500 with a beta of around 0.8. What makes this company attractive during bad weather is its steady business and steady return to investors via dividends and share repurchasing. The company's balance sheet is solid, and its long-term debt to capital is 47 percent, below that of Waste Management (WM) at about 55 percent. Republic Services also has the capacity to decrease its total debt, which would free up cash--management's litmus for the health of the business. The annual dividend is 3.3 percent for the company's shares. As we reported last month, Bill Gates' foundation also increased its total stake in Republic Services by 12 percent. When a billionaire's foundation looks to a particular stock for capital preservation, it's probably not a bad bet for the do-it-yourself investor.
McDonald's (MCD) is a quick-serve restaurant with an average transaction size below $10, giving it appeal as an eatery during broader macroeconomic slips. With a beta of 0.42, it is not highly correlated to the broader market. The company presently issues a dividend of 3.1 percent and, unlike Burger King (BKW), has a strong management history. Its business model is royalty-based--a swell arrangement in which McDonald's essentially takes a 4 percent cut of the gross revenues of each franchise (activist investor Bill Ackman helped the company realize and accentuate this model quite well).
Altria (MO) holds Philip Morris USA and a set of wine and tobacco producers. To start, the company has a 4.5 percent dividend and low beta of 0.45. Its sales derive from businesses with relatively non-volatile demand; though cigarette demand has steadily decreased, the company's diversity in smokeless tobacco, wine, and cigars will continue to give it a steady stream of cash. Philip Morris International (PM), which spun-off its U.S. operations in Altria, is another investment idea along these lines.
The Southern Company
Utilities are a common recommendation for recession-resistant stocks. The Southern Company (SO) holds Alabama Power, Georgia Power, and other companies that have a steady stream energy sales to a relatively flat customer base. Management allocates capital smartly and efficiently, and maintenance and operating expenses are expected to decreases in the second half of 2012, buttressing the company's already strong financial profile. With a dividend goal of around 4.1 percent, and a low correlation to the broader market (beta=0.27), the Southern Company is an attractive utility to add to an "uncorrelated bet" portfolio.
Disclosure: I am long PM.