Even though the Dow remains above the 12,000 mark, it would do investors well to consider the impact a renewed recession might have on their portfolios. It might be tempting to move to an all-cash position, but before you make such a hasty move, take the time to look at stocks that have the ability to hold up in tough times.
I used the Motley Fool CAPS supercomputer to look for companies that have proven to be less volatile than the market, but which have been reporting strong revenue and earnings growth over the past few years. With a beta of one or less, these companies ought to react less violently to any market swoon.
By adding in a measure of cheapness -- these stocks also carry a P/E ratio that's less than average -- we build in a margin of safety. However, with the CAPS community according them high ratings, we're getting companies that are expected to outperform.
Below are a handful of stocks that look like they could do well in an extended downturn.
3-Year Avg. Rev. Growth
3-Year Avg. EPS Growth
LHC Group (NAS: LHCG)
Lincoln Educational Services (NAS: LINC)
Meadowbrook Insurance Group (NYS: MIG)
Source: Motley Fool CAPS screener.
Searching for an answer
With the Justice Department investigating the billing practices of Amedisys (NAS: AMED) , and the Securities and Exchange Commission probing the home health services industry, it's difficult to muster much enthusiasm for Amedisys, Almost Family, or LHC Group. Analysts think the industry is in for a round of steeper-than-expected Medicare reimbursement cuts and have downgraded everyone in the space.
Which is exactly why these stocks could be good investments going forward. Everyone is already expecting the home health services industry to perform poorly, but it's based on an unknown quantity. A decision will bring greater clarity about the future, and with the industry being depressed, they represent undervalued opportunities.
Although LHC Group trades at a slight premium to its rivals on market multiples, book value, sales, and even cash flow, it sports better growth prospects over the next year or two than most of its peers.
CAPS member BuffettJunior1 says the aging population will take care of LHC: "This stock is dirt cheap! The aging baby-boomer population will provide this company with steady growth for a very long time."
Let us know on the LHC Group CAPS page whether you think this will be a stock you can retire with.
The Education Department seems to be falling back on its heels. Following revelations that the Government Accountability Office issued an error-riddled report that overstated, if not fabricated, performance problems in the for-profit education industry, the department issued watered-down rules on so-called "gainful employment."
Now the industry is fighting back. The Association of Private Sector Colleges and Universities, representing the likes of Corinthian Colleges (NAS: COCO) , Education Management, and Lincoln Education -- but not Apollo Group (NAS: APOL) , which isn't a member -- is suing the department to block implementation of the regulations.
While for-profit educators had been viewed as an investment pariah after the GAO report, they've now graduated to the head of the class. Education Management is up 50% over the past six months, while Bridgepoint Education (NYS: BPI) is up 42%. Lincoln trades 30% higher.
CAPS All-Star ServusDei7 sees Lincoln Education as an undervalued but consistent performer in the industry: "Single digit P/E, consistent earnings for at least the past 10 years with good growth, high ROE, healthy balance sheet, and good yield. Clearly a winner."
Add the educator to the Fool's free portfolio tracker to follow along on how well it prepares its students for the workforce.
Ensuring a profitable outcome
Call it a perfect storm. Property and casualty specialty insurer Meadowbrook Insurance Group is typically able to ride out different market cycles because it provides a diverse line of products. Between 2006 and 2010, it was able to compound EPS growth by 9.7% at the same time its book value per share grew 10.4%.
However, the tornadoes, flooding, and generally storm-ravaged quarter we just passed through ended up hitting its earnings this quarter by $12.5 million, or double its normal loss. Earnings will be reduced by $0.08 per share as a result. Yet underscoring its financial strength, the losses did not trigger its catastrophe reinsurance program.
That could explain why 96% of the CAPS members rating the insurer think it will outperform the market, and all but one All-Star weighing in agrees. If you're interested in learning whether Meadowbrook Insurance will test new highs, add the stock to your watchlist to get all the Foolish news and analysis about it.
Take a recess
Market downdrafts can wreak havoc on your portfolio, but there's no reason to hide your money in the mattress. These three recession fighters look to have the goods to keep your portfolio on the upswing, but it pays to start your research on these stocks on Motley Fool CAPS. Then weigh in with your own thoughts on which stocks you think can keep the dogs of recession at bay.
At the time thisarticle was published The Motley Fool owns shares of Bridgepoint Education and Almost Family. 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.Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here.
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