8 Stocks to Buy in Case There's a Recession

BOSTON ( TheStreet) -- American consumers are reordering their spending priorities by doing without, and they're trading down by buying cheaper store brands instead of designer labels. An uncertain job market coupled with a money squeeze on necessities such as food and fuel has them changing their shopping strategies.

There's a lesson in there for investors.

Consumers' newfound penurious attitude is the result of an unemployment rate of an elevated 9.1%, the lack of new jobs, and the high price of gas and rising commodities prices that has resulted in higher food and clothing costs.

Consumers will be making fewer shopping trips and keep them closer to home because of the high price of gas, Standard & Poor's Equity Research Services said in a recent report.

Because of that, big discounters, including some supermarket chains and membership-warehouse clubs, particularly those that sell gas, should get a growing share of consumer purchases, as should select convenience and drugstore chains with big footprints.

Providers of so-called consumer staples, which are day-to-day items such as household and personal products, and food and beverages, are also looking good right now, since demand remains consistent in any economic environment.

Some investors are already reacting to the prospect of these changes in consumer spending.

Consumer-staples stocks are up 7% this year and 18.2% over the past 12 months through June 2, while the S&P 500 Index is up 5.3% this year and 22% over 12 months.

Within the consumer-staples stock sector, the big gainers this year are tobacco companies, up 18.4%; personal products, up 9.4%; food, up 8.4%; and food and staples retailing, up 5.3%.

Here are eight stocks that should weather the current economic conditions in fine form:

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As a play on more people cooking and eating at home, the old-line packaged-goods maker J.M. Smucker ( SJM) is worth considering. Its product lineup includes Folgers coffee, Smucker's fruit spreads, Jif-brand peanut butter, Hungry Jack baking and pancake mix, Pillsbury flour, Crisco shortening and oils, ice cream toppings, health and natural foods, and beverages.

Smucker, which already dominates the baking products aisle at the supermarket, is now making a big move down the coffee aisle.

It acquired the well-known Folgers coffee business in November 2008 from Procter & Gamble ( PG) in a deal that gave P&G shareholders about 53% of Smucker's outstanding shares at the time.

And three weeks ago, Smucker acquired Rowland Coffee Roasters, a maker of several brands popular with the Hispanic market, for $360 million. The company recently signed an agreement with Green Mountain Coffee Roasters ( GMCR) to manufacture its single-serve coffee cups, which is the fastest-growing segment of the category.

Morningstar analyst Erin Lash said in a May 16 research note that "recent acquisitions have more than tripled Smucker's long-term debt, but the company can comfortably make interest payments, with earnings before interest and taxes at seven times interest expenses. Over the next five years, we forecast operating income to cover interest expense nearly 10 times."

But S&P, which has Smucker rated "hold," said the company's recent decision to raise coffee prices will boost future profit margins, and the ratings firm is keeping its fiscal 2011 earnings estimate at $4.75 per share and raising its 2012 outlook to $5.05 per share from $4.90.

Smucker shares carry a dividend yield of 2.2%.

Analysts ratings on Smucker include: five "buys," one "outperform," eight "holds" and one "underperform," according to FactSet.

Shares of Smucker are up 22% this year, and 48% over the past 12 months. Their long-term performance is particularly impressive with a five-year annualized return of 17% and a 10-year annualized return of 13.5%.

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When faced with the belt-tightening realties of a shrinking food budget, some people may turn to Spam or Dinty Moore's beef stew for their dinner's main course.

Both are brand-name products of Hormel ( HRL), which sells 34 branded products that held either the number one or two positions in terms of sales in their particular food categories.

"As part consumer-product company, part meatpacker, Hormel has developed a brand identity for pork and turkey products in what has traditionally been a commodity-driven business," say Morningstar analysts of the Austin, Minn.-based company.

Although it has shown particular strength through prior recessions, "input cost volatility can still affect profitability and we are concerned that Hormel could find it difficult to raise prices in order to offset higher costs," said Morningstar analyst Erin Lash in a recent research note.

The company's "input costs" include the cost of hogs, most of which it purchases, and the cost of grain it feeds to the turkeys it raises for its other meat products.

Standard & Poor's, which has a "sell" rating on its shares, are also concerned about operating margins.

In addition, the forward price-to-earnings ratio 16.5 is pricey, given the S&P 500's current average of 13.7 and the food industry's 8.

Analysts' consensus earnings estimate is for $1.72 per share in the current fiscal year rising 25 to $1.76 in 2012.

The company has no significant long-term debt.

Analysts give it one "buy" rating, one "outperform," 11 "holds" and one "sell," according to Morningstar.

Its shares are up 15.3% this year, 48.6% over the past year and, supporting the view that it's a good bet in any economy, it has a 10-year annualized return of 10.6%.

Its shares, currently trading at $29.13, off a recent 52-week high of $30.35, have a market value of $7.8 billion.

Casey's General Stores ( CASY), a chain of 1,500 convenience stores in nine Midwestern states, could benefit as consumers' choose to shop closer to home to save on gas.

The Iowa-based company's stores are located mostly in small, rural communities where they have little competition. They sell gas on a self-service basis, and fuel makes up about 70% of sales, but offer slim profit margins.

So the company makes up for that on its sales of cigarettes, food, beverages, health and automotive products from which it garners almost 80% of its profits.

For fiscal 2011, analysts estimate the company will earn $2.54 per share and that will grow 4% to $2.90 in 2012.

Its shares, currently trading at $39.40, are down 5.6% this year, but are up 11% over the past year, giving it a market value of $1.6 billion. The shares have a sterling 10-year annualized return of 14.4%, versus the 2.4% of the S&P 500 for that period.

An enticement for speculative investors is that the company could get bought out by a national chain, although in the past year its management has turned down offers from Alimentation Couche-Tard, a Canadian convenience store chain, and one from 7-Eleven, a subsidiary of Seven & I Holdings of Japan.

Analysts give it two "buy" ratings and four "holds," according to an S&P survey. The ratings firm itself gives it a "buy" rating.


Delhaize Group ( DEG), based in Belgium, is little-known in the U.S. but is the parent company of the Food Lion, Hannaford and Sweetbay supermarket chains in the eastern U.S. It owns about 2,700 stores in five countries, but gets about 70% of its sales from the U.S.

What sets it apart from other supermarket chains is that it earns some of the highest margins in the industry, particularly in the U.S. Morningstar analysts say "Delhaize is an industry leader in profitability, generating nearly 5% operating margins compared with 3% to 4% earned by many of its peers.

"However, the company is finding growth more difficult today as it faces a cash-strapped consumer in the U.S. and strong competition in Belgium," the analysts said.

But they note that it "has the resources and capability to act as a consolidator in the U.S. grocery industry" and so could leverage its existing store network to better operating margins.

Delhaize doesn't get much analyst coverage in the U.S. Its ratings on Bloomberg include one "buy" and one "hold."

Delhaize disclosed two weeks ago that the U.S. investment giant BlackRock ( BLK) now owns 5.1% of its shares, the biggest of any investment stake.

Delhaize shares are up 10.3% this year, but up only 1.6% over the past 12 months. It has a strong, five-year annualized share-price return of 6.3%.

Morningstar has a fair value estimate of $105 on its shares, which is about a 30% premium to its current price.

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Walgreen ( WAG), the largest U.S. retail drug chain in terms of revenue, has a product base that is largely unaffected by changes in the consumer habits as prescription drugs account for more than two-thirds of its sales and the balance is convenience items such as packaged foods, and household and personal-care products.

It also has a huge national footprint with almost 8,000 stores, and that mix of convenience and must-have products should help it weather any economic contingencies.

Walgreen has a store within three miles of 63% of the U.S. population, giving the company a significant convenience advantage over most of the competition, according to Morningstar analysts.

The company also has a fast-growing specialty pharmacy and mail-order services businesses in addition to its retail operations.

In April, its sales increased 5.5%, including a 3.4% rise in same-store sales, and in May they rose 7% including a same-store sale gain of 3.6%, very healthy for the competitive drug store chain industry.

In its fiscal year just ended, it posted its 36th consecutive year of record sales and earnings. Sales rose 6.4% to $67.4 billion while earnings before interest and taxes increased 6.5% to $3.5 billion.

Walgreen has paid a dividend over 78 consecutive years and raised its dividend for 35 consecutive years. And it has increased its dividend by a compound annual growth rate of 24.3% percent over the last six years.

Analysts give it 14 "buy" ratings, four "outperforms," and eight "holds," according to FactSet.

The company has agreed to sell its pharmacy-benefit management unit to Catalyst Health Solution ( CHSI) for $525 million in cash, in a transaction expected to close by the end of this month. That will help its balance sheet and give it the flexibility to respond to economic challenges as well as continue its long-running dividend.

S&P said in a research note that the company also has an active share repurchase program that is helping per share earnings growth. It expects earnings to increase 24% in fiscal 2011 to $2.64 per share.

For fiscal 2012, analysts estimate Walgreen's earnings will grow to $2.98 per share.

S&P has a price target of $47 on its shares, which is an 8.6% premium to its current price.

Its shares, which have a market value of $40 billion, have gained 12% this year and 37.5% over the past year.

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Some may not consider cigarettes consumer "necessities," but the record shows otherwise, as tobacco industry sales have proven consistent in all sorts of economic environments.

Lorillard ( LO), the nation's third-largest tobacco company and the maker of the popular Newport-brand of cigarette, might well be the best bet in this industry right now.

For one thing, its management is big on returning value to shareholders. Two weeks ago its board raised the company's existing $1 billion buyback plan by $400 million and will fund the program from its hefty cash position. It also has a dividend yield of 4.67% based on its current share price of $108. Its shares have a $15 billion market valuation.

S&P, which has a "buy" rating on the company's shares, says that "despite an annual low to mid-single digit rate of decline in cigarette volume for the domestic tobacco industry, Lorillard was able to increase its net sales at a compound annual growth rate of 12.1% in the period from 2006 to 2010.We view the company's cash flow and balance sheet as strong."

Morningstar analyst Philip Gorham wrote in a research note on May 16, that the Newport "brand's performance during the recent recession demonstrated that Lorillard's competitive advantage can survive both strong and weak economies, despite its positioning as one of the highest-priced U.S. cigarette brands at retail and the low-income profile of its core consumer."

He added that Newport's sales volume has declined by just 1% annually over the last five years, a rate well below the 4% yearly decline in the U.S. cigarette industry.

Morningstar has a $120 price target on its shares, which is a 6.5% premium to the current price.

Analysts have two "buy" ratings on its shares as well as four "buy/holds" and five "holds," according to S&P. Those some analysts' consensus view for 2011 is for earnings of $7.69 per share, for 2011, rising by 10% to $8.43 in 2012.

Lorillard shares are up almost 50% in the past three months, 43.6% this year and have gained 68% over the past year, resulting in a market valuation of $16.5 billion.


Kimberly-Clark ( KMB) is known for its branded product line in the health and hygiene category, including bathroom tissues, diapers, feminine products, and paper towels under the brand names Kleenex, Scott, Huggies, Pull-Ups and Kotex.

Standard & Poor's has a "hold" rating on its shares because it expects the company will face "input cost inflation and continuing, intense competition in developed countries and in its consumer tissue and personal care categories."

S&P's analyst survey found three "buy" ratings, two "buy/holds," nine "holds," and one "weak/hold" ratings. Those same analysts' consensus estimate on earnings for 2011 of $4.85 and that they will rise 8% to $5.24 per share in 2012.

Its shares, which have a projected dividend yield of 4.19% on the current share price of $65.75 have gained 7.2% this year and 12.8% over the past 12 months.

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Costco Wholesale ( COST) is one of the leading warehouse clubs. It gets much of its operating profits from membership fees but also has gas pumps at many of its stores, a sort of double bonus for its earnings in the current economic environment.

Costco saw a 13% rise in May at stores open more than a year, boosted in great part by gas sales. Without that help same-store sales would have been up only 7%.

Although it has Costco rated "hold," Standard & Poor's veritably raves about the company. "We expect (Costco) to increase its market share in the near term, as we see it pricing aggressively as it maintains a strong value proposition and a relatively upscale product mix that appeals to a more affluent customer base," it said in a recent research note on the company. "We think the company is well positioned to generate long-term earnings growth due to new store expansion and what we view as a strong balance sheet."

Wall Street firms' analysts give it nine "buy" ratings, five "buy/holds," 10 "holds," and three "weak/holds," according to S&P. For fiscal year 2011, those same analysts estimate that Costco will earn $3.33 per share and that that will rise 16% to $3.85 per share in 2012.

Costco shares have a 1.22% dividend yield and are up 10% this year and 35% over the past 12 months, to $78.04, resulting in a market value of $34 billion.

>>To see these stocks in action, visit the 8 Stocks to Buy in Case There's a Recession portfolio on Stockpickr.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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