15 Stocks for Shelter in a Stormy Market

Ride out turbulence with these high-quality, low-risk investments.

Is the stock market out of control? It's a fair question to ask when you see automated trading programs dump gazillions of shares at the end of the day and clip 2% off the value of troubled and thriving companies alike. Consider that between July 19, when the Dow Jones industrials closed at a then-record 14,000, and mid September, the Dow lost 200 or more points on eight different days and gained 200 or better four times.

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Although unremarkable in percentage terms, frequent moves of this magnitude are, not surprisingly, leaving investors uneasy. Throw in a barrage of negative headlines -- the subprime-mortgage mess, falling housing prices, a credit crunch, a spike in foreclosures, weakening employment and growing fears of a recession -- and it's no wonder that many investors are focusing less on making a killing and more on avoiding a slaughter.

The obvious move for pessimists and the faint of heart is to sell some stocks and move the proceeds to cash or bonds. But we don't recommend that course unless you'll need money soon for a particular goal or project (for editor in chief Knight Kiplinger's take on market timing, see Market Timing the Right Way). Don't forget that the stock market's long-term trend is up.

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A better tack is to seek shelter in stocks that are best suited to weather a market storm -- whether it's a mere thundershower or a cataclysmic hurricane. With a number of pundits suggesting that the U.S. may experience a recession within the next year, you should focus on low- to moderate-risk, high-quality businesses that can survive and perhaps even thrive in a deteriorating economy. It also helps to look for stocks, such as AT&T and American Express, that historically have shown they can quickly rebound from massive, marketwide selloffs.

Keeping these factors in mind, we present you with five strategies for identifying stocks that will keep you out of trouble during stormy markets. Plus, see Four Low-Risk Mutual Funds for our picks that are built to avoid catastrophic losses but that are capable of rewarding shareholders over the long term.

Low risks, good gains

Finding a stock that beats the market but does so with less risk is as close as you'll come to nirvana in the investing world. For statistics geeks, the intersection of safety and good performance means a stock has a high alpha and a low beta. Alpha measures the amount by which an investment's return exceeds the yield of risk-free Treasury bills. Beta compares a stock's movements with that of a benchmark -- for domestic stocks, typically Standard & Poor's 500-stock index. Stocks with high alphas and low betas usually earn high grades from the Value Line Investment Survey for "price stability" and "earnings predictability," hallmarks of low-risk investments.

Look back five years and this exercise turns up a bunch of energy and technology stocks. Both sectors remain attractive, despite reputations for being unpredictable and closely connected to the overall health of the economy. Looking back over the past three years, you find more health, food and service companies to go with the energy and tech stocks. What you won't find are retailers, financial companies (other than some insurers), housing and real estate companies, media and publishing firms, automakers, and plain old laggards of scant interest in any kind of market. The performance of these previously low-risk, high-performance stocks since the market's July peak has been mixed.

One stock that has performed well -- up 7% from July 19 to September 17 (compared with a 4% loss for the Dow) -- is Medco Health Solutions (symbol MHS), the nation's largest pharmacy-benefits manager. Medco, which was spun off by drug giant Merck in 2003, says it has a 96% client-retention rate. The Franklin Lakes, N.J., company predicts large increases through 2014 in sales of generic drugs, which it likes to see insurers require because lower prices for meds encourage greater usage. Medco's shares have gained 41% annualized over the past three years.

Schlumberger (SLB), the world's largest oil-services company, has also performed admirably in a soggy market. Its shares have climbed 8% since July 19 and, benefiting from steadily rising energy prices, they returned an annualized 38% over the past five years. Strong economic growth around the world should continue to fuel demand for oil and gas. That drives spending on exploration and gives Schlumberger the incentive to develop and sell new technologies. The Houston-based company's size and worldwide reach, plus $3 billion in its treasury, make it as secure a stock as you can find.

Up year in, year out

Past performance, as you know, is no guarantee of future results. But there's something reassuring about a stock that goes up year after year. The list of stocks with positive returns every year in this millennium, including 2007 (to September 17), is short -- only 39 stocks with market capitalizations of at least $1 billion have been in the black for each of these eight years.

The list is an honor roll of innovation and managerial excellence. Among the honorees, Garmin has been the year's top performer, gaining 92%, including an advance of 31% since July 19. Does that make Garmin, the leader in global-positioning-system devices, a safe bet? Only if the Cayman Islands-based company can maintain its amazing earnings growth rate, presently 74% a year, with new and more-profitable products, such as those intended for pilots and aircraft manufacturers. It would be disastrous for the stock, however, if Garmin failed to hit analysts' sales and earnings estimates, because the company's forecasts have been so upbeat. Garmin, which trades at a rich 37 times estimated 2007 earnings, may still have room to grow, but we're reluctant to label it a safe stock.

You'll follow a totally different track with Sigma-Aldrich (SIAL). The St. Louis-based specialty-chemical company supplies lab materials to biotechnology, pharmaceutical and academic researchers, with no one customer accounting for more than 2% of revenues or any product more than 1%. The company predicts steady but modest annual sales growth of 7%, plus whatever it can add from acquisitions. There's ample cash flow and not much debt. The stock follows a well-deserved pattern of higher highs and higher lows and hasn't suffered a sharp, quick fall in seven years.

Two venerable and sedate members of the gains-every-year society are Ametek (AME) and Henry Schein (HSIC).

Shares of Ametek, which makes industrial gear such as gauges, vacuum motors and heat exchangers, have climbed at least 12% each year since 2000. Half of the Paoli, Pa., company's sales come from outside the U.S. Schein, based in Melville, N.Y., is a distributor that supplies physicians, dentists and veterinarians with just about everything a medical professional needs. Schein experienced a rare earnings decline in 2004, yet its stock still advanced 3%. Both Ametek and Schein date back to the 1930s, possess solid balance sheets, have fine growth prospects and hold powerful positions in their industries. Although anything can happen, it's hard to imagine either company botching its business.

Dividend growers

Dividends don't protect you from traders' panics because the herd doesn't always care about what it dumps. But cash payouts can still relieve some pain.

S&P's dividend "aristocrats" list -- companies that have raised their dividends at least 25 straight years -- isn't a surefire refuge because it's crowded with banks and retailers. With so much talk of recession and a credit crunch, bank stocks in particular may be vulnerable in the coming few months.

But one aristocrat, Procter & Gamble (PG), may be the safest blue chip of all. The consumer-products powerhouse operates in a predictable, global, low-risk business. The Cincinnati company successfully integrated the then-controversial 2005 takeover of Gillette, giving investors one less issue to worry about. P&G shares spent most of the past three years wandering between $50 and $65, but they are now at a record-high price of $68. The shares, which yield 2.1%, are up 10% since the market started to decline in July, and are barely half as wobbly as the typical S&P 500 stock.

Real estate investment trusts, business-development companies, royalty trusts and pipeline partnerships are all known for high yields, but their shares get bumpy. If you can't abide any bounces, stay away.

However, if you are patient and let the income cushion any unease, pipelines have the highest and most predictable dividend growth: 6% to 10% annually. Although they're still ahead for the year, pipeline stocks have slumped of late, which is unusual because over the long term they have tended not to move in sync with the overall market. Three good choices for the year ahead are Kinder Morgan Energy Partners (KMP), Magellan Midstream Partners (MMP) and Teppco Partners LP (TPP). Yields range from 6.2% to 7%. For tax reasons, you should avoid owning master limited partnerships inside an IRA.

Debt-free winners

Debt-free businesses are often service companies that don't build plants, install much equipment or finance and hold inventory. Companies with little or no debt carry an extra margin of safety that comes in handy when lenders are reluctant to part with their cash.

Expeditors International (EXPD) hits every screen for strong, consistent growth. Plus, its line of business offers safety. Expeditors is a global logistics company that secures air and sea cargo space and helps exporters with insurance and customs clearing. There is a strong correlation between its profits and the volume of world trade, so a recession in the U.S. wouldn't necessarily depress profits much. More than half of Expeditors' employees are outside the U.S., and much of its business involves direct trade between Europe and Asia. Despite a 7% drop since mid July, the stock has returned an annualized 20% over the past three years, and an annualized 27% over the past five.

Another debt-free success story is T. Rowe Price Group (TROW), the Baltimore-based fund-management company. Its stock has below-average volatility. In its history as a public company, there have been few noticeable declines in the shares. The stock is down 3% since mid July but still up strongly for the year, and up an annualized 34% for the past five years.

Instant diversity

The more ways and places that a firm makes money, the less pain you'll feel when some part of the enterprise stumbles. Conglomerates go in and out of favor, but they've worked well lately. One reason is globalization. Since the July 19 peak, shares of S&P 500 companies with at least half of their revenues outside the U.S. have fared better than homebodies by more than three percentage points, losing 6% versus 9%, according to Bespoke Investment Group.

Four big, ultra-diversified companies -- Danaher (DHR), 3M (MMM), Textron (TXT) and United Technologies (UTX) -- did even better, down by a few hairs since the July 19 top and well up for the year on the strength of solid industrial and defense businesses and, just as important, global reach.

The quartet on average generate half their sales from foreign operations. This matters if you believe earnings still move stock prices: So far in 2007, U.S. companies' overseas profits (in dollar terms) are up 18% compared with an increase of 5% in domestic earnings. Any company tied into the global economy can better fight off a consumer-led recession at home. Not surprisingly, all four stocks have low volatility -- in fact, Danaher and United Tech are in the lowest 10% of S&P 500 stocks. Textron has more swing, but it also has the highest five-year return of the bunch: 28% annualized.

NEXT: Four Low-Risk Mutual Funds

Staff Writer, Kiplinger's Personal Finance