Europe Downgrade: Here Are 10 Stocks Showing Resilience to Europe's Meltdown

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We all knew this was coming. European officials have confirmed earlier reports that France and Italy will both see their credit ratings cut this afternoon by ratings agency Standard & Poor's.

S&P is set to downgrade France's long-term credit rating by one notch to AA+, while Italy's sovereign rating would be cut two-notches to BBB+, three levels above junk rating.

"CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole," S&P said at the time.

Higher probability of economic decline
Standard and Poor's currently gives the region a 40% probability of output decline in 2012, led by difficulties in Spain, Portugal, and Greece.

Even though this isn't completely unexpected, U.S. stocks are trading lower on the news, although it's quite possible traders could be taking profits ahead of the long weekend.

But it's become clear that the new year rally is starting to lose steam, and headline risk out of Europe will remain a key issue for portfolio managers as they position themselves for the new year.

Not to mention the Iranian conflict, weakening U.S. retail sales and unresolved Greek debt negotiations.

Next week should be interesting.

Business section: Investing ideas
Looking for stocks that might be immune to the unfolding crisis in Europe? To help you get started, we crunched the numbers on the top 100 performing stocks from Friday's session when news of the S&P downgrade occurred.

In other words, these stocks rallied despite the bad news out of Europe, which may be a bullish signal for investors that are worried about headline risk.

To control the quality of the list, we only focused on companies that have a market cap north of $300M.

Of course, it'll be silly to base an investment decision purely on one day's worth of trading relative to a news event. Which is why we decided to analyze the profitability trends of Friday's biggest gainers.

To get a deeper look into these profit trends, we performed DuPont analysis on our starting universe.

In case you haven't heard of this technique, DuPont analysis looks at return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:

ROE

= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

We therefore focus on companies with the following positive characteristics: Increasing ROE along with,

  • Decreasing leverage, i.e., decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e., increasing Sales/Assets ratio) and improving net profit margin (i.e., increasing Net Income/Sales ratio)

Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

The DuPont analysis suggests these companies have encouraging profit trends, and today's price action seems to indicate they have some resilience to the bad news out of Europe -- should any of these names be on your list?

List sorted by performance during Friday's session. (Click here to access free, interactive tools to analyze these ideas.)

1. Sturm, Ruger & Co. (NYS: RGR) : Engages in the design, manufacture, and sale of firearms in the United States. The stock gained 7.56% during Friday's session. MRQ net profit margin at 13.34% vs. 10.34% y/y. MRQ sales/assets at 0.434 vs. 0.397 y/y. MRQ assets/equity at 1.356 vs. 1.356 y/y.

2. Standard Motor Products: Distributes replacement parts for motor vehicles in the automotive aftermarket industry primarily in the United States, Canada, and Latin America. The stock gained 5.76% during Friday's session. MRQ net profit margin at 5.52% vs. 4.25% y/y. MRQ sales/assets at 0.451 vs. 0.409 y/y. MRQ assets/equity at 2.155 vs. 2.659 y/y.

3. Questcor Pharmaceuticals (NAS: QCOR) : Provides prescription drugs for central nervous system and inflammatory disorders. The stock gained 4.34% during Friday's session. MRQ net profit margin at 38.2% vs. 36.84% y/y. MRQ sales/assets at 0.272 vs. 0.213 y/y. MRQ assets/equity at 1.272 vs. 1.324 y/y.

4. Penske Automotive Group: Operates as an automotive retailer in the United States, Puerto Rico, the United Kingdom, and Germany. The stock gained 4.16% during Friday's session. MRQ net profit margin at 1.89% vs. 1.12% y/y. MRQ sales/assets at 0.687 vs. 0.672 y/y. MRQ assets/equity at 3.876 vs. 3.902 y/y.

5. Polypore International (NYS: PPO) : Develops, manufactures, and markets microporous membranes used in separation and filtration processes. The stock gained 3.62% during Friday's session. MRQ net profit margin at 12.42% vs. 8.16% y/y. MRQ sales/assets at 0.13 vs. 0.109 y/y. MRQ assets/equity at 3.146 vs. 4.022 y/y.

6. Grand Canyon Education: Provides postsecondary education services in the United States. The stock gained 3.20% during Friday's session. MRQ net profit margin at 11.82% vs. 10.85% y/y. MRQ sales/assets at 0.359 vs. 0.351 y/y. MRQ assets/equity at 2.066 vs. 2.215 y/y.

7. Essex Property Trust: Engages in the ownership, operation, management, acquisition, development, and redevelopment of apartment communities primarily in the West Coast of the United States. The stock gained 3.07% during Friday's session. MRQ net profit margin at 7.54% vs. 6.63% y/y. MRQ sales/assets at 0.031 vs. 0.03 y/y. MRQ assets/equity at 2.804 vs. 3.359 y/y.

8. Diamond Offshore Drilling (NYS: DO) : Operates as an offshore oil and gas drilling contractor worldwide. The stock gained 3.01% during Friday's session. MRQ net profit margin at 29.25% vs. 24.82% y/y. MRQ sales/assets at 0.128 vs. 0.123 y/y. MRQ assets/equity at 1.605 vs. 1.739 y/y.

9. Harley-Davidson (NYS: HOG) : Produces and sells heavyweight motorcycles, as well as offers motorcycle parts, accessories, and related services. The stock gained 2.85% during Friday's session. MRQ net profit margin at 13.14% vs. 7.05% y/y. MRQ sales/assets at 0.144 vs. 0.125 y/y. MRQ assets/equity at 3.731 vs. 4.585 y/y.

10. The Children's Place Retail Stores: Operates as a children's specialty apparel retailer in North America. The stock gained 2.59% during Friday's session. MRQ net profit margin at 6.96% vs. 6.91% y/y. MRQ sales/assets at 0.554 vs. 0.518 y/y. MRQ assets/equity at 1.441 vs. 1.51 y/y

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Eben Esterhuizen does not own any of the shares mentioned above.

At the time this article was published Motley Fool newsletter services have recommended buying shares of Polypore International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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