Watch List: Seven Undervalued Recession-Proof Stocks

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(Article by Becca Lipman. List compiled by Eben Esterhuizen, CFA)

Markets were crushed on Thursday on signs of slowing growth in China and Germany and a gloomy economic outlook from the Federal Reserve, reported CNBC. In response, investors fled to the safety of the US dollar and government bonds.

The U.S dollar climbed 1.36%, which pushed down U.S crude oil prices by over 5%. Gold dropped nearly $50/ounce and European stocks fell 4% to a two-year low "dragging an index of global equities to a one-year trough". This was all before 11AM.

Market volatility is no thing of the past, and more cloudy days may still be ahead for the global economy.

So, how can you prepare yourself for more market losses?

For ideas we went back into time, and identified a list of stocks that outperformed the market during each of the last three big market downturns over the last decade (between 10/01/2007 - 03/02/2009, 04/19/2010 - 06/28/2010, and 07/18/2011 to the present day).

In addition, all of these stocks appear to be undervalued, when comparing levered free cash flow to enterprise value.

Considering the track record of these companies during downturns, are they being underestimated by the market?

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted by each stock's average alpha relative to the S&P 500 during the three downturns over the last decade.

1. Arch Capital Group Ltd. (ACGL): Provides insurance and reinsurance products worldwide. Between 10/01/2007 and 03/02/2009: Price changed from $25.16 to $17.52, a price return of -30.37% (alpha of 24.33%). Between 04/19/2010 to 06/28/2010: Price changed from $25.29 to $25.47, a price return of 0.71% (alpha of 10.98%). Between 07/18/2011 and 09/18/2011: Price changed from $32.32 to $33.65, a price return of 4.12% (alpha of 10.97%). [Average Alpha: 15.43%] Levered free cash flow at $527.50M vs. enterprise value at $4.15B (implies a LFCF/EV ratio at 12.71%).

2. Meadowbrook Insurance Group Inc. (MIG): Operates as a specialty commercial insurance underwriter and insurance administration services company in the United States. Between 10/01/2007 and 03/02/2009: Price changed from $8.72 to $5.58, a price return of -36.01% (alpha of 18.69%). Between 04/19/2010 to 06/28/2010: Price changed from $7.97 to $8.77, a price return of 10.04% (alpha of 20.3%). Between 07/18/2011 and 09/18/2011: Price changed from $9.49 to $9.51, a price return of 0.21% (alpha of 7.06%). [Average Alpha: 15.35%] Levered free cash flow at $53.57M vs. enterprise value at $527.85M (implies a LFCF/EV ratio at 10.15%).

3. Synopsys Inc. (SNPS): Provides technology solutions used to develop electronics and electronic systems worldwide. Between 10/01/2007 and 03/02/2009: Price changed from $27.47 to $17.94, a price return of -34.69% (alpha of 20.01%). Between 04/19/2010 to 06/28/2010: Price changed from $23.03 to $21.96, a price return of -4.65% (alpha of 5.62%). Between 07/18/2011 and 09/18/2011: Price changed from $24.15 to $25.99, a price return of 7.62% (alpha of 14.47%). [Average Alpha: 13.37%] Levered free cash flow at $294.70M vs. enterprise value at $2.56B (implies a LFCF/EV ratio at 11.51%).

4. Unico American Corp. (UNAM): Unico American Corporation, an insurance holding company, underwrites property and casualty insurance. Between 10/01/2007 and 03/02/2009: Price changed from $10.42 to $6.59, a price return of -36.76% (alpha of 17.94%). Between 04/19/2010 to 06/28/2010: Price changed from $9.03 to $8.91, a price return of -1.33% (alpha of 8.94%). Between 07/18/2011 and 09/18/2011: Price changed from $10.17 to $10.76, a price return of 5.8% (alpha of 12.65%). [Average Alpha: 13.18%] Levered free cash flow at $6.36M vs. enterprise value at $43.92M (implies a LFCF/EV ratio at 14.48%).

5. Mediware Information Systems Inc. (MEDW): Mediware Information Systems, Inc. and its subsidiaries develop, market, license, implement, and support clinical management and performance management information software systems and solutions in the United States and the United Kingdom. Between 10/01/2007 and 03/02/2009: Price changed from $6.99 to $4.25, a price return of -39.2% (alpha of 15.5%). Between 04/19/2010 to 06/28/2010: Price changed from $8.84 to $9.22, a price return of 4.3% (alpha of 14.57%). Between 07/18/2011 and 09/18/2011: Price changed from $11 to $11.1, a price return of 0.91% (alpha of 7.76%). [Average Alpha: 12.61%] Levered free cash flow at $7.27M vs. enterprise value at $62.67M (implies a LFCF/EV ratio at 11.6%).

6. MKS Instruments Inc. (MKSI): Provides instruments, subsystems, and process control solutions that measure, control, power, monitor, and analyze parameters of manufacturing processes worldwide. Between 10/01/2007 and 03/02/2009: Price changed from $19.35 to $11.75, a price return of -39.28% (alpha of 15.42%). Between 04/19/2010 to 06/28/2010: Price changed from $20.7 to $20.26, a price return of -2.13% (alpha of 8.14%). Between 07/18/2011 and 09/18/2011: Price changed from $24.86 to $24.65, a price return of -0.84% (alpha of 6.01%). [Average Alpha: 9.86%] Levered free cash flow at $128.07M vs. enterprise value at $707.26M (implies a LFCF/EV ratio at 18.11%).

7. Fresh Del Monte Produce Inc. (FDP): Produces, transports, sources, markets, and distributes fresh and fresh-cut fruit and vegetables worldwide. Between 10/01/2007 and 03/02/2009: Price changed from $28.97 to $17.88, a price return of -38.28% (alpha of 16.42%). Between 04/19/2010 to 06/28/2010: Price changed from $20.89 to $20.84, a price return of -0.24% (alpha of 10.03%). Between 07/18/2011 and 09/18/2011: Price changed from $26.19 to $23.8, a price return of -9.13% (alpha of -2.28%). [Average Alpha: 8.06%] Levered free cash flow at $167.94M vs. enterprise value at $1.43B (implies a LFCF/EV ratio at 11.74%).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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