Stocks to Buy in a Recession

So if you're young and socking away savings for retirement, or if you're older, brave and want to purchase stocks and funds before evidence of an economic recovery is visible, here are some stock and fund ideas.

Two kinds of companies that tend to hold up well in a recession are those involved in health care and those that produce or sell consumer necessities. Companies in both sectors typically generate a lot of cash flow and maintain strong balance sheets. That means they don't need to tap unfriendly credit markets for financing.

David Chalupnik, head of equities for First American Funds, values the earnings consistency and steady growth of Abbott Laboratories (symbol ABT) and Medtronic (MDT). Abbott's growth actually appears to be accelerating, says Chalupnik, and Medtronic's management is cutting costs and running its business more tightly.

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Turner Funds' Bob Turner, who specializes in fast-growing companies, is bullish on Gilead Sciences (GILD), a biotechnology firm that he calls "the next Big Pharma company." Gilead made its name in HIV treatments, but Turner also sees opportunity in Gilead's drugs for treating hepatitis B and hypertension.

Chris Baggini, who manages an Aberdeen fund that owns stocks and sells some shares short (a bet on falling prices), also figures that health care is relatively immune to recession. He favors CVS Caremark (CVS), which, after its merger with Caremark, is now part drug retailer and part private-benefits manager. Baggini likes CVS's acquisition of Longs Drugs, noting that CVS has a long history of acquiring and improving drugstore chains' operations, as it did with Eckerd.

Ron Rimkus, manager of BB&T Large Cap fund, is a big fan of Kraft Foods (KFT) and its chief executive, Irene Rosenfeld. "People still have to eat," he says. The maker of dozens of brands of packaged foods -- from Kraft macaroni and cheese to Oreo cookies -- benefits from crumbling commodity prices. Moreover, in early December, shares of this multinational giant served up a tasty 4.2% dividend yield.

As a retailer, Wal-Mart (WMT) isn't usually lumped into the same category as food and health-care companies. But the world's largest retailer certainly sells plenty of consumer necessities. Baggini thinks Wal-Mart will benefit as consumers trade down and search for the lowest retail prices. Indeed, Wal-Mart saw surprisingly strong sales growth in November, a disastrous month for nearly every other publicly traded retailer.

Tech on sale

The case for technology stocks is different. Companies are slashing capital expenditures, so tech manufacturers will feel some pain in the short term. But many of the most powerful players in the industry, with robust balance sheets and cash flows, are on sale. These outfits will survive, continue to invest in research and development, and thrive when the cycle turns.

Turner thinks that even during this recession, Google (GOOG) will generate earnings gains of 25% a year because of its expanding share of advertisement spending (Google is one of our top eight picks for the year; to see the rest of them, turn to page 32). He also likes Apple (AAPL), for its mastery of such electronic gadgets as iPods and iPhones, and Broadcom (BRCM), which designs the chips for the iPhone and many other popular devices.

Stocks in economically sensitive industries, such as industrial equipment and commodities, have cratered because of recession fears. But therein lies a large opportunity, say veteran investors such as Don Hodges, of Hodges fund, and Jerry Jordan, of Jordan Opportunity fund. Many cyclical stocks, they say, already reflect the recession and then some, and they're selling at extraordinarily favorable prices.

Hodges, a crusty Texan, is buying Transocean (RIG), the world's largest operator of deep-sea drilling rigs, most of which are leased in long-term contracts. He also likes Boeing (BA) for its enormous backlog of orders for the new Dreamliner aircraft. In the small-company camp, he favors Commercial Metals (CMC), a steel-scrap business that in early December traded at five times earnings and at about 75% of book value per share (assets minus liabilities). It yields 5%.

Jordan also finds offshore deep-water drillers, such as Diamond Offshore Drilling (DO), too cheap to pass up. Diamond has no debt and has rig contracts signed for the next two years, says Jordan. He estimates that the company will earn $14 a share in 2010, up more than 20% from what analysts see Diamond making in 2009. Growth of that magnitude in a dreadful economy is bound to attract investors.

Overseas stocks

Foreign stock exchanges have been hammered even harder than stocks in the U.S. Through the end of October, says Leuthold, 43 stock markets around the globe suffered bigger declines than the drop in the S&P 500, which at its maximum point of stress plunged 44%. Sarah Ketterer, the bargain-hunting manager of Causeway International Value fund, is pounding the table for economically sensitive, high-quality companies in the capital-goods, industrial and engineering businesses. "I think this is a once-in-a-lifetime opportunity to own the very best companies worldwide in every industry," she says. "Investors don't want to own them at any price, which is about as interesting as it gets for a value investor."

Ketterer thinks she will reap big gains within a few years in German engineering giant Siemens (SI) and Japan's Fanuc (FANUF.PK), the world leader in robotics and factory-automation tools. Both stocks trade in the U.S. as American depositary receipts. And both trade for a bit more than book value, produce abundant cash flows and have strong balance sheets. "The first glimmer of economic recovery will be priced into these stocks very quickly," Ketterer predicts.

Jim Moffett, manager of UMB Scout International, prefers to hide out in health-care and consumer-staple stocks while most of the developed world remains mired in recession. Two of his health-care picks are Denmark's Novo Nordisk (NVO), the largest insulin producer, and Israeli generic-drug giant Teva Pharmaceutical Industries (TEVA). Two of his fund's core holdings are Switzerland's Nestlé (NSRGY.PK), the world's largest food company, and British American Tobacco (BTI).

If you're looking to increase the international-stock allocation in your fund portfolio, Causeway International Value (CIVVX) and UMB Scout International (UMBWX) are fine no-load choices. Over the long term, Asia should remain the highest-growth region in the world. One relatively tame way to invest in Asian emerging markets is through Matthews Asian Growth & Income (MACSX). Co-manager Andrew Foster says that many of the stocks he's buying yield 6% or more, a level he hasn't seen since the fund's inception in 1994. He's also buying bonds that yield 12% and more.

Back in the U.S., if you want to increase your exposure to health care, consider T. Rowe Price Health Sciences (PRHSX). Its manager, Kris Jenner, is a doctor by training. Two Kiplinger 25 funds that have a healthy respect for shareholders' capital and have excellent long-term results are Bruce Berkowitz's Fairholme (FAIRX) and Steve Romick's FPA Crescent (FPACX).

Finally, if you can't make up your mind whether to be bullish or bearish, consider Hussman Strategic Growth (HSGFX). A flexible mandate allows manager John Hussman to own the stocks and industries he likes while simultaneously short selling what scares him. Hussman, an economist by training, has shown a deft hand running this hedge-fund-like mutual fund since its inception in July 2000. Aside from a brief period in 2003, Hussman says, he finds the U.S. stock market undervalued for the first time in a decade. He believes stocks can return 8% to 10% compounded over the next ten years.