With the Dow falling back 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 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 any extended downturn.
CAPS Rating (out of 5)
3-Yr. Avg. Beta
3-Yr. Avg. Rev. Growth
3-Yr. Avg. EPS Growth
Alliance Resource Partners (NAS: ARLP)
Williams Partners (NYS: WPZ)
Source: Motley Fool CAPS Screener.
Revving its engines
Because the coal industry is under attack as the EPA imposes draconian air quality regulations, miners like Arch Coal (NYS: ACI) and Alpha Natural Resources (NYS: ANR) find their shares off more than 50% just in this year alone. Utilities are finding it more profitable to shift to natural-gas-fired facilities than use coal. Demand for coal in the U.S. for electricity generation is expected to drop 10% in 2012, which the Energy Department says will be the lowest level since 1984.
Yet not all coal stocks are created equally. Alliance Resource Partners, as a master limited partnership, is required to distribute its profits back to shareholders, making its cost of capital better and creating an overall more efficient operation. Its yield is 7%, which compares favorably to Arch's 2% yield and Peabody Energy's 1.4%. And while Alliance is not immune from the trends impacting the rest of the industry, it did realize sales that were 5% higher than the year-ago period on higher volumes and prices. Still, inventories rose due to the mild winter and it admits that achieving its 2012 goals will be difficult because electricity generation and coal demand have fallen sharply.
Fool writer Steve Binge also points to Alliance's high debt load that pushes its debt-to-equity ratio to more than 109. Yet because the MLP is able to generate lots of cash yet, he finds it slipping from the noose because of the current low interest rate environment: "Alliance Resource is arguably the best run and most profitable of the coal companies currently domiciled in the U.S. and it is poised to do well over the long term. The patient investor with a long-term focus should do very well over time."
The CAPS community largely agrees with that assessment, as 97% of those rating the coal company believe it will outperform the market indexes. Let us know in the comments section below or on the Alliance Resource Partners CAPS page if you agree it's got a different future than most coal miners, and add the stock to your watchlist to see if it can prosper as the industry digs out of its current hole.
In a liquid state
Another limited partnership that has attracted a lot of investor attention is natural gas midstream operator Williams Partners, a pipeline and storage facility operator that's 70% owned by nat gas specialist Williams (NYS: WMB) .
The pipeline market is where much of the action in the industry is occurring these days, fueling rich M&A deals as the industry consolidates. Energy Transfer Partners is buying Sunoco for its northeastern pipeline network, Kinder Morgan bought El Paso, and Marathon Petroleum is trying to decide whether to spin off its pipeline assets.
Investing in oil and gas storage and transmission facilities is like investing in the picks and shovels of the gold rush. Even with drillers reducing the number of rigs in service, inventories continue to rise and they need a means of getting oil and gas from where it's drilled to where it's stored.
Williams Partners also has a healthy dividend yielding 5.9%, which undoubtedly attracts a lot of investors. Among the CAPS members weighing in, 92% of them believe it will beat the Street, and our CAPS tracking shows Wall Street itself is nearly unanimous in its opinion of further gains. Keep track of its progress by adding Williams Partners to the Fool's portfolio tracker, then tell us in the comments section below whether you think its stock will be transported to a higher plane.
Take a recess
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At the time thisarticle was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Alliance Resource Partners. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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