With the Dow crashing through the 13,000 level, the threat of a recession is palpable, so it would do investors well to consider the impact an extended downturn might have on our 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 have reported 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 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 two stocks that look like they could do well in any extended downturn.
3-Year Avg. Beta
3-Year Avg. Rev. Growth
3-Year. Avg. EPS Growth
Pan American Silver (NAS: PAAS)
Silver Wheaton (NYS: SLW)
Source: Motley Fool CAPS screener.
The long-term view
It's probably not so surprising to find two silver specialists on the list of companies that would do well in a recession. Particularly if inflation is about to run rampant -- and there are signs that might be about to occur -- investors would likely flee to hard assets like gold and silver.
We know China is hoarding gold. Imports from Hong Kong alone soared 1,400% in February and with the jewelers strike over in India, the country that is the world's biggest buyer of bullion is set to resume its previous spendthrift policies toward the precious metal. India is also the biggest importer of silver and while imports into China are down year over year, it still remains a net importer. I expect both metals to get a big boost soon and own both in various forms.
High on the list of concerns that will drive precious metals higher is Europe's shaky finances. Remember all the talk about PIIGS two years ago? They're back with a vengeance now and the dominoes are wobbling after Spain's disastrous bond auction (Italy managed to quell the fears momentarily with a successful one of its own). Yet equally portentous is the Federal Reserve's announcing back in February that it was considering the idea of issuing floating rate notes (FRNs) as suggested by its advisory committee, which is essentially JPMorgan Chase and Goldman Sachs.
An interesting article at ZeroHedge posits the FRN's would be useful in minimizing capital losses in the event interest rates soared. So the fact Treasury is even thinking about this is giving warning signs that it expects much, much higher interest rates in the near future. With a decision coming at May's meeting on whether FRNs are in the cards, we'll see what's coming sooner rather than later. Thus the machinery is in place for gold and silver prices to rise dramatically.
Despite suffering a mechanical failure at Manantial Espejo that resulted in two weeks of downtime, and interruptions at Alamo Dorado, as well as confronting import restrictions in Argentina, Pan American Silver was still able to produce about 22 million ounce of silver, albeit slightly below projections and above anticipated costs. Hecla Mining's (NYS: HL) also tumbling as a result of temporary mine closures, though its problems will be more protracted than Pan American's.
Indeed, the issues at Pan American's mines are largely behind it now and its Navidad project looks like it can provide a big boost to the company. Production of as much as 22.5 million ounces at a per-ounce cash cost between $12.50 and $13.50 is now expected for 2012. Moreover, it closed on its acquisition of Minefinders and royalty payments from Brazil's government are expected to rise 37.5%.
Shares of Pan American are down more than 50% over the past year, but I suspect we'll see it closing that gap soon enough, along with Silver Wheaton, whose shares are down by a third.
With Goldcorp's Penasquito mine being finalized, the silver streaming specialist will enjoy more than 7 million ounces of silver production annually, up from 5.3 million in 2011. Further, it's expected to average 9 million ounces annually over the first five years from Barrick Gold's Pascua-Lama mine, when it enters production next year.
Silver Wheaton is able to dodge a lot of the macroeconomic conjoining of silver and its industrial uses because of its low, fixed-cost business model that allows it to turn $0.82 of every dollar generated into profit. Pan American, by comparison has turned less than a quarter of sales into profits, meaning the macroeconomic pressures on sovereign debt herald a bullish opportunity in silver, and in Silver Wheaton.
CAPS member RockyMountainMan also expects inflation to be a primary driver of Pan American while noting that Silver Wheaton sets itself above the fray because it's not a miner itself: "This guy doesn't mine. It is a silver broker and removes the political risk of mine closures, environment and governments."
I've rated both silver companies to outperform the markets on CAPS, so add Pan American Silver and Silver Wheaton to your watchlist, then let us know in the comments section below if you agree the machinery is in place for dramatically higher inflation leading to equally dramatic increases in silver prices.
Take a recess
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At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of The Goldman Sachs Group and Pan American Silver. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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