Market Plunge Series: Stocks for a Good Night's Sleep

by: Larry Meyers

The recent market volatility -- which is a nice way of saying "crash!" -- serves as a wake-up call for every investor. It's a good time to take a hard look at your portfolio and re-evaluate your risk tolerance. It turns out that my series on "Creating The Perfect Portfolio" also comes into play here. The focus of that series was to suggest a broadly diversified portfolio that will outperform the market in the good times and bad. It was also designed to give peace of mind during turbulent times like these.

Now might be a good time to examine some stocks that I did not include in that portfolio, but would if I had the time to follow them all in close detail. These are stocks that will help you sleep at night, because you should be comfortable with the businesses that those stocks represent, and confident that at some point any losses will be recovered.

You'll note that many are large companies. Just in case a double-dip recession looms, the security that a rock solid balance sheet offers cannot be underestimated.

Berkshire Hathaway (NYSE:BRK.A) is the no-brainer of no-brainers. Under the stewardship of Warren Buffett, Berkshire's portfolio of companies creates plenty of cash flow. The diversification within Berkshire itself should give one reason to breath easy. Add to the fact that it is more than 20% off its 52-week high, and you have your first pillow for your new bed.

McDonald's (NYSE:MCD) Heck yes! I'd rather have a Big Mac attack than a heart attack. Note that the stock is barely off its all time high of late July, because every investor should know that McDonald's is good whether the economy is or not. They make money because their world-class brand name, cheap food, expanding product line, and consistent cash flow in the billions. A 3% dividend doesn't hurt, either.

Chevron (NYSE:CVX) is another safe haven, although some may accuse me of pooh-poohing a potentially huge drop in oil prices if we enter another recession. I'm not concerned about oil prices. I'm focused on Chevron's world-class operation, 3.3% dividend, that they have $3 billion more cash than debt, and $14 billion in free cash flow over the TTM. (NASDAQ:AMZN) has become the internet retailer brand name that will never be replaced. When I buy something online these days, 90% of the time, the transaction goes through Amazon. It's reliable. It has the biggest selection. It has the best prices. It has $6.3 billion in cash and no debt. It is still growing. It isn't going anywhere. And at 15% off it's 52-week high, it's also a bargain. The stock may fall from its present level, but to me, it's an opportunity to add to any position I might have. Amazon is one stock I have complete confidence in as far as returning to any previous high.

Want a few surprises? Try Portfolio Recovery Associates (NASDAQ:PRAA). This company buys charged-off receivables for a penny or two on the dollar, then collects on them. And they are darn good at it, too. In these difficult economic times, there are plenty of bad debts to buy and collect, and the company just keeps blasting forward, growing earnings at 30% this year, and 25% next year.

You may think that $300 million in debt is alarming, but if you examine the cash flow statement, the company has virtually no capital expenditures, meaning cash flow from operations is almost the same as free cash flow. In 2010, that FCF leapt by 75% to $133 million. The stock is 25% off its high and business is booming so well that the company is actually hiring while others are laying folks off.

Copart, Inc. (OTC:CPRKQ) is a company that might give some folks nightmares, because they salvage cars that have been destroyed and re-sell them. People will always be crashing cars no matter what the state of the economy, and Copart has revolutionized the salvage business. With $268 million in cash on the books, no debt, and 15% earnings growth, Copart will not crash like the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.