this week, the current market environment could prove to be a real
opportunity for investors -- if the
sputters to life. And even as there's ample reason to expect the
economy and the stock market to eventually strengthen, recent
economic data raises concerns that things may get a bit worse
before they get better. In fact, U.S. Treasury Secretary Tim
Geithner recently warned that the
may tick up in the near-term.
So even as investors position their portfolios with potential
gainers, stocking it with defensive plays that are unlikely to fall
much in the event of further economic weakness isn't a bad idea
either. To be sure, income-oriented plays like utilities are often
seen as a
against market weakness, thanks to their stable and secure payouts.
But know that if
rises and government bonds offer higher yields, these
income-producing equities could suffer from comparatively weaker
With that in mind, here's a look at three stocks that should hold
their own in tough times, thanks to their prodigious and steady
. Each of these companies might actually benefit from any downturn
as they could deploy their considerable cash balances to buy back
an ever-increasing number of shares as stock prices fall.
Bristol-Myers Squibb (
Shares of this large drug maker didn't fall very much when stocks
were tanking in early 2009 thanks to a strong
, boringly predictable revenue streams and a juicy
. These days, the company remains a bit boring -- sales grew +2% in
the most recent quarter -- and investors are so indifferent that
shares offer a hefty 5% dividend yield. Yet Bristol-Myers Squibb's
financial firepower is so strong that the company is also
conducting a $3 billion share buyback while maintaining that
Looking ahead, the company may even start to look like a growth
stock again. It is pursuing several new blockbuster drugs including
cancer drug ipilimumab, the diabetes drug dapagliflozin, and the
anti-clotting drug apixaban, which is being co-developed with
. But right now, focus on the protection afforded by the company's
steady operating cash flow, which now tops $5 billion a year.
As noted earlier, any share price weakness would allow management
to get even more out of that massive share buyback program while
pushing the dividend yield ever-higher.
ConAgra Foods (
We all need to eat. And in tough economic times, we're more likely
to eat at home rather than dine out. That sets up this maker of
prepared foods to be a solid defensive play. The company owns such
brands as Hunts, Orville Redenbacher, Chef Boyardee, Hebrew
National and Peter Pan. In recent years, ConAgra has beefed up its
exposure to the frozen food aisle with brands like Marie Callender,
Healthy Choice and Banquet.
In recent years, management has learned to operate this business
more efficiently, steadily boosting EBITDA margins from 10.6% in
fiscal 2008 to 13.1% in fiscal 2010. Management believes the EBITDA
margin can hit 15% in the next few years, while analysts expect
profits to rise around +10% in each of the next two years.
As profits rise, ConAgra is adding more than $500 million to its
balance sheet every year. As debt is paid down, more money is left
for share buybacks and acquisitions. The company is already in the
midst of a $500 million share buyback, which could reduce the share
count by about -4%. If no compelling acquisition opportunities
emerge during the next year, that share buyback is likely to be
extended. The company could also seek to boost its dividend, which
currently yields about 3.4%.
Shares trade for around 11 times next year's projected profits.
With that below-market
, shares would be cushioned against the pressures of a weakening
It may seem odd to include this stock among a group of defensive
investments. But shares have fallen so far, and the company's
balance sheet is so strong, that any further share price weakness
Management is tasked with turning around its cell phone business
losses to the likes of
Apple (Nasdaq: AAPL)
. That may take several years. In recent quarters, Nokia's
management has poured more resources into R&D, vowing to once
again become relevant in the smart phone market.
In the mean time, Nokia has $11 billion in cash -- $6 billion when
debt is subtracted -- which can help to sop up a lot of shares
while they are out of favor. The company has a history of doing
this: A decade ago when shares were out of favor after the dot-com
implosion, Nokia started buying back its stock, ultimately reducing
the share count from 4.8 billion to a recent 3.7 billion. The
company could buy back another 650 million shares right now at
current prices for about $5.6 billion, which would boost
earnings per share (
by nearly +18%.
Action to Take -->
These stocks can help investors sleep a little easier at night, as
they are not likely to fall as quickly as most growth-oriented
names. Management at each company is taking steps to boost sales
and profits and has the benefit of a bullet-proof balance sheet to
work with. Investors may want to add these defensive names to their
portfolio while the economy is still wobbling on its axis. Once the
economy is on the mend, sell off positions like these and focus
more squarely on stocks poised for higher growth.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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