Five companies that shine, even as the economy darkens

 

Today, we consider the very real possibility that the American economy—currently growing at less than 1% annually—will soon be in recession. After years of wage stagnation, the consumer is only just getting by at present, despite a recent wave of corporate hiring. In the event of a recession, companies will begin to tighten their belts, and the consumer will have to cut spending drastically.

So why, you may ask, does that make me want to buy stock? Well, it doesn’t, exactly, but it does make me want to invest a greater portion of my assets in the companies that are most likely to weather such a storm. Fortunately, there’s a simple way to determine which companies are more recession resistant than others, and while it almost sounds too simple, it has long been one of the key methods used by investment guru Warren Buffet.

I am talking, of course, about profit margin. Companies with low profit margins are quickly pushed into losses when recessions hit, while companies with high profit margins continue to make money. They do make less money, of course, in the short term, but for such companies, making less money does little to threaten their operations. The five stocks on today’s list have met a number of my value criteria, but in all cases, profit margin has been heavily weighted.

As always, remember to consider these ideas to be just that, ideas, and do your own research before investing.

Gilead Sciences (GILD)

Did you see this one coming? Well, don’t kick yourself, Gilead Sciences has been out of favor this year as competitors such as Merck (MRK) emerge with Hepatitis-C treatments, threatening the (really, really) immense profit stream from Gilead’s breakout drug Sovaldi. That sounds bad, but the consensus estimate is that tried and true Sovaldi is likely to hold 85% of market. Also, while the average price of Sovaldi is declining, the lower price will allow for more patients, including Veteran’s Administration patients to get the treatment.

Gilead has a fantastic profit margin of 50.5%. GILD shares also trade for only seven times estimated 2017 earnings, while the average multiple for the industry is 14. Sounds oversold to me.

GILD

Chart courtesy of www.stockcharts.com

Magellan Midstream Partners (MMP)

You’ve surely looked at a midstream company or two before now, particularly if you favor dividend-paying investments, so I’ll go ahead and jump to what differentiates Magellan from its peers. First, Magellan’s assets include not only gas and oil pipelines, but marine storage and refined-products pipelines as well. Second, the company’s contracts include required minimum volumes, so its revenue can’t fall nearly as dramatically as it otherwise could. Finally, the company just got a cash infusion from a $500 million debt offering, yet its balance sheet still looks healthy.

Magellan’s profit margin is 38.8%, which is excellent for a company in this industry. The company’s forward annual dividend yield is 4.62%, and given the strength here, the dividend appears more likely to go up than to go down.

MMP

Chart courtesy of www.stockcharts.com

MasterCard (MA)

Much has been made of threats to credit cards in the financial media in the past few years, and most of it, I’m happy to report, has been total hogwash. In fact, the increasing preference of consumers for any form of payment other than cash has been, and will remain, an incredible boon. Another fiction plaguing credit card stocks is the idea that their revenue growth is sharply limited to GDP growth. In fact, their revenue growth, though tied to GDP, is much higher. With US GDP now below 1%, MasterCard’s revenue is still on track to rise by 9% in 2016 and estimated to rise by 10% in 2017.

If we should enter recession, MasterCard’s profit margin of 37.4% will ensure that the profits keep flowing. Even better, the company’s profit margin is currently trending higher. There’s nothing like getting a bigger piece of a bigger pie.

MA

Chart courtesy of www.stockcharts.com

Public Storage (PSA)

Public Storage keeps ending up on my value list, no matter what criteria I use. This company is growing its earnings and revenue at 8% annually and 9% annually respectively, yet somehow, shares of PSA have fallen out of favor, down 10% ytd. I can’t help but imagine that this business—storage sheds—just seems so pedestrian and, well, low-rent, that investors assume this can’t possibly be the stock that will make them rich. But it very well may be. As a REIT, PSA can buy and sell real estate when the opportunity presents itself without tax penalty, and if it has to hold onto land for a long time, it gets paid for doing so. The company’s occupancy rate of 95% suggests it is in a business where demand is virtually infinite.

As for the profit margin, that’s 54%—the highest on today’s list.

PSA

Chart courtesy of www.stockcharts.com

BlackRock (BLK)

Investment management company BlackRock was founded in 1988, but the company became Wall Street legend in the 2008 financial crisis, when the government hired the firm to find out what was going on in its own federal banks which, by their own report, could no longer make sense of their own books. Since that time, BlackRock has increased its money under management explosively, mostly through passive investments, including, most notably, the iShares ETFs. For a money managing company, passive investments are gold for three reasons: clients and prospective clients love the freedom of choice they offer, no money or resources need to be spent to hire money managers, and if their value crashes, the providing company can’t be blamed in any way.

BlackRock has a profit margin of 28.8% and a relatively low trailing P/E of 20.

BLK

Chart courtesy of www.stockcharts.com

Symbols: BLK GILD MA MMP PSA
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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