Building a Recession-Resistant Portfolio

In an article that I recently penned, I made the argument that the U.S. economy is already in a recession - even if the powers that be don't want to see it. My argument was fairly simple - unemployment is up, capacity utilization is down, inflation is up, and the Fed is still pushing rates lower. Even if all of those trends were halted right now, the damage has still been done.

I want to add another layer of recession evidence in this article. More importantly, I want to give you a few ideas so you can defend your portfolio just in case any recession cuts deep.

Whether it's intentional or not I can't say, but some of the stocks - and groups of stocks - that have taken leadership roles are the defensive names that many long-termers seek out when the economy is, shall we say 'challenged'?

Are investors forecasting a recession by picking recession-proof stocks? Could be. Consumer staples appear to be the beneficiaries of almost everything else's demise. Currently, food, tobacco, and household supplies are all looking better than average.

But it's not only consumer goods putting the pedal to the metal (as least as much as they can). The other traditional recession-proof sectors, including utilities and casinos, are also perking up right on cue. Yes, casinos. Anybody new to the investing game may not believe it, but old hands who've seen a couple of economic contractions will know it to be true - casinos can thrive in the worst of times. (I think we could be in the midst of a nuclear holocaust, and most of Vegas' Baccarat tables would still be full.)

Anyway, the recent, and not-so-recent results of these areas appear on this table. Some of the long-term numbers for these groups may not look all that great. But, especially in light of the recent numbers, it's a good thing because it means they're still likely to be undervalued.

With these sectors and industries in mind, here are my 'best of' picks for each one. Is this a complete portfolio solution? No, not by a long shot, but it'll at least plant some seeds.

Consumer Staples

Since this sector tends to be the main (and sometimes only) winner during a rough patch, it may not hurt two pick two or three companies from its different industries. So, I did.

Tobacco: British American Tobacco plc (BTI) would be my pick here, though most of the major tobacco companies might be fine. BTI's chart just looks a little more consistent, and it seems to have a fairly robust international market share. According to last quarter's earnings report, the fundamentals look great, with quarterly earnings growing at 34.5%, and showed a solid, 21.6% profit margin. Nothing fancy.

Food: Well, it's not actually food as my pick from this category is actually Boston Beer (SAM). Its stock got destroyed in early November, but I still see it as a value proposition. The fundamentals? Well, the current figures don't really tell the whole story - the numbers look terrible because the company had a terrible last quarter. The rising price of hops took a big bite out of profits. Unless prices continue to skyrocket, I think it will be able to figure out a plan B.

On a side note, the rumor is that Anheuser-Busch (BUD) may be shopping for an acquisition target to help share expenses with. I've not heard that Boston Beer is on any list, but I have to wonder.

Personal Products: There are actually several different ways to approach this including cleaning products, toiletries, or even make-up. All of these should do pretty well in the coming months. Since I have to pick one though, I chose USANA Health Sciences (USNA).

I'd be the first to confess the fundamentals are just mediocre. However, there's something incredibly odd - in a good way - with the company's float. There are 16.1 million shares outstanding, and 7.4 million in the float. The short interest (as of the last snapshot) is a bizarre 7.3 million shares.

The 'good' in that is the potential. For those of you who've seen and traded short interest before, you know this is a bullish powder keg - we just need a spark. The downside is, how did the short interest get this off-kilter in the first place? Maybe the sellers remain in control. However, weighing the risk and reward, I'm willing to bet with the stock rather than against it.

Utilities

This was a tough one, but I have to think UIL Holdings (UIL) is going to keep building on its recovery effort. The last couple of years were pretty erratic in terms of revenue. Though still a little shaky, at least now, it's shaky growth.

Casinos

The Wynn Resorts (WYNN) chart looks better than the underlying numbers, but I don't think the most recent results tell the whole story. Even so, with a P/E of 66.0, it still seems a little over-priced. I think the Wynn name commands enough respect from the market to make for a temporary position given the environment, but I wouldn't marry this stock, just yet.

The Bottom Line

As always, nothing is ever guaranteed, and this doesn't necessarily mean you should be shedding anything that's not a casino, utility stock, or a consumer staple. However, with the Fed clearly desperate at this point, I still suspect we're already in a recession. If so, I'm looking for defensive companies like the ones we discussed here to be the lone bright spots for the next few months.

Disclosure: None