Sunday, May 27

Week 47 - Stocks that Rock!

Situation: Some stocks perform so strongly in economic downturns that there’s not much need to balance the risk of ownership with a hedge like intermediate-term Treasury Notes or Savings Bonds. Utility stocks are the traditional example of this phenomenon, and that is because at least half of their capitalization is gained by issuing long-term bonds. Those bonds have a lower rate of interest because of the implicit guarantee of the utility by a state government. When an economy is in recession, the bonds also are issued at a lower rate of interest. This leaves the utilities with more retained earnings, which are frequently needed for plant upgrades. That reduction of interest expense also makes it possible to pay down some debt. The question for this week is: Do any other stocks show those attractive, recession-proof features? It’s worth the effort to look closely to find any others because those stocks could be owned without the necessity of balancing the risk of bankruptcy with an equal investment in bonds.

Interestingly, there are a few utility-like stocks out there that fit our criteria. We’ve found 10 on our Master List (Week 39). In the accompanying Table, we have compared those with the 3 utility stocks on the Master List. The stocks are ranked in the order of Finance Value because this represents the reward gained over ~10 yrs minus the risk of loss during the 2007-09 bear market. Taken together, these 13 stocks perform like a modern hedge fund (see Week 46). Seven of the 13 stocks are also found in what we call the Lifeboat Stocks category (see Week 8 & Week 23): WEC, MKC, HRL, SO, ABT, BDX, NEE. The remaining 6 stocks are part of what we call Core Holdings (Week 22): MCD, CHRW, OXY, CB, CVX, XOM. (Numbers highlighted in light blue in the Table indicate out-performance and numbers highlighted in red indicate under-performance.)

Bottom Line: There are some stocks that behave (after a fashion) like utility stocks by having strong returns in recessionary times and, therefore, don’t have to be hedged.

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