Recession-Proof Stocks

For some companies, misfortune can mean opportunity. This is especially true for "countercyclicals" -- companies that benefit from economic weakness.

Wal-Mart Stores (symbol WMT (opens in new tab)) is somewhat countercyclical. It has been benefiting as hard-pressed consumers trade down to lower-priced goods during the recession. So are dollar stores, although the stocks of two of them, Dollar Tree Stores (DLTR (opens in new tab)) and Family Dollar Stores (FDO (opens in new tab)), came under pressure in early February on concerns that this recession is so severe that even bargain-basement retailers would suffer.

Given the perilous state of American consumers, we decided to look elsewhere for companies that not only will hold up during this recession but may even thrive. Check out these five:

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As the employment picture grows bleaker each day -- the jobless rate now stands at 7.6%, a 35-year high -- more people are heading back to the classroom to sharpen their skills. Apollo Group (APOL (opens in new tab)), the nation's largest for-profit education company and parent of the University of Phoenix chain, benefits handsomely.

Degree enrollments were up 18% in Apollo's first quarter, which ended November 30, compared with the same period a year earlier. That fueled a 22% increase in earnings for the quarter.

Through February 9, the stock has surged 10% so far in 2009. At $84.23, it trades at a pricey 22 times estimated earnings of $3.80 a share for the fiscal year that ends this August. That would represent a gain of 38% from the previous year's earnings. The premium may be justified. "To have positive earnings growth now is something," says Shawn Price, manager of the Touchstone Large Cap Growth fund. "But to have double-digit earnings growth in this environment is tremendous."

As the largest auctioneer of construction and agricultural equipment, Ritchie Brothers Auctioneers (RBA (opens in new tab)) experiences an upswing when financially pinched companies need to get rid of machinery. In fact, it had a bumper crop of sales in 2008, a record $3.6 billion, representing a 12% increase from 2007 in gross auction proceeds.

Ritchie's large global network brings together large numbers of buyers and sellers. The company rarely purchases equipment outright, so it has little inventory risk.

This business is likely to grow as the recession worsens and more companies find themselves in need of cash. And some firms may prefer to buy used equipment as part of belt-tightening measures. Analysts expect auction prices to fall, but Ritchie Brothers can still do well. "It may get some pricing pressure from the equipment it sells," says Robert Mitchell, co-manager of the Conestoga Capital Advisors Small Cap fund, "but that will be more than offset by the higher volume it sells."

Analysts anticipate 13% profit growth in 2009, to 91 cents a share. The stock, which closed February 9 at $19.13, trades at 21 times that earnings estimate.

The growing number of foreclosures hurts many businesses; after all, if consumers can't afford their mortgages, they won't have money to spend elsewhere. However, the problems of strapped homeowners can yield a bonanza for Public Storage (PSA (opens in new tab)), a real estate investment trust. "When people shoehorn themselves into a 5,000-square-foot house and then have to rent a 1,000-square-foot apartment, that means they need to rent the cheapest thing they can find for their stuff," says Price.

Self-storage REITs held up well last year. The group had an average return of 5.1% while the typical property-owning REIT declined by 37%, according to the National Association of Real Estate Investment Trusts. Shares of Public Storage have gotten off to a rough start in 2009, falling 17% through February 9. Analysts expect earnings growth to slow to 2.2% this year, to $4.86 per share, then jump by more than 5% in 2010.

Public Storage, based in Glendale, Cal., is the largest self-storage operator. It has a strong balance sheet and should have no trouble covering its $2.20-per-share dividend. At $65.75, the stock yields 3.3%.

Consumers and businesses aren't the only ones in financial straits. Municipalities are struggling, too, and that could boost American Water Works (AWK (opens in new tab)), the Voorhees, N.J., water utility. As cities and states find it too expensive to run their municipal water systems, American Water can swoop in to buy the distressed assets.

American Water had been a subsidiary of Germany's RWE AG before it was spun out in an initial public offering last April. Under RWE, American Water was stymied by a number of contracts with low profit margins. But as those contracts expire, the company is replacing them with more-profitable deals.

Alan Lancz, editor of The Lancz Letter, expects American Water to post high single-digit earnings growth. "And that's not counting any strategic acquisitions," he says. With the stock yielding 3.8% at the current share price of $21.48, a total return of 8% to 10% is a conservative estimate and would be "very attractive in this type of market." The stock sells at 16 times estimated 2009 earnings of $1.34 per share.

Our last pick isn't a true countercyclical but rather a manufacturer of consumer necessities that has shown resilience in tough times. Colgate-Palmolive (CL (opens in new tab)) dominates the oral-care business, with a 44% market share in toothpaste and 29% in manual toothbrushes. And it is expanding its share in both categories. Toothpaste is a segment of the consumer market marked by strong brand loyalty and minimal inroads by private-label brands. "You're probably not going to brush your teeth any fewer times even though there's a recession," says Peter Schofield, of Knott Capital Management, which runs the Quaker Capital Opportunities fund.

Colgate had one of this earning season's best reports when it posted a 20% gain in fourth-quarter profits. Colgate benefited from lower material costs while it was able to charge higher prices for its toothpastes, Irish Spring soaps and other personal-care items. Analysts expect earnings of $4.24 per share in 2009, up 16% from the $3.66 the company earned last year. At the February 9 close of $64.15, the stock trades at 15 times estimated '09 earnings.