Recession-resistant safe haven stocks

With the “R” word being thrown around more and more these days, investors are taking evasion action to protect their portfolios. Some are fleeing the markets in favor of commodities like gold, while others are liquidating investments and holding on to cash.

For those planning on staying the course, so-called defensive stocks—those with resilient earnings and dividends that tend to be solid during sharp slowdowns—are the vehicles of choice.

While no company is totally bullet-proof, here are five stocks that may help protect your portfolio:

McDonald’s Corp.
In a downturn, market uncertainty prompts investors to seek refuge in companies that can deliver predictable growth, such as larger firms with solid footprints that usually produce high-quality earnings. McDonald’s Corp. (NYSE:MCD) is one such firm with a strong balance sheet that produces the steady streams of cash needed to run operations and pay consistent dividends.

McDonald’s has had five consecutive years of monthly global same store sales increases that have kept the fast-food icon on the rise even as other restaurant stocks have lost significant value, some to the tune of 50% to 60% or more. Despite the soft economy and sagging markets, McDonald’s stock has shown above average performance.

People must eat regardless of the economic picture, and while fast food is anything but immune to economic downturns, McDonald’s has put together a winning formula: a combination of convenience, fast service, menu variety and everyday value.

Thanks its highly-competitive dollar menu, McDonald’s appeals to even the most cash-strapped consumers. And it has come a long way in terms of food quality, now giving pricier sit-down restaurants a run for their money. Couple that with the fact its easy-to-find locations are situated within 2 miles of 90% of its customer base and its franchise model gives it direct oversight of its supply chain, which helps it fight rising commodity prices, and its no wonder the fast-food giant continues to serve up profits. Almost universal brand recognition doesn’t hurt, either.

Holding shares of this resilient stock could leave investors saying “I’m lovin’ it.”

Johnson & Johnson
The conventional wisdom says the best strategy for stock-market investors is to buy defensive stocks during an economic downturn. Traditionally, pharmaceutical and medical device stocks like Johnson & Johnson (NYSE:JNJ) tend to fair well in trouble times.

Since people continue to take medication and seek out medical treatment even when pinched by a weak economy, the maker of prescription drugs, medical devices, baby care items and contraceptives holds up well in tough times.

While drug sales have taken a hit due to stepped up generic competition, consumer product sales and revenue from medical devices and diagnostics have been very healthy. Income has been boosted by offerings like the January launch of the over-the-counter version of allergy drug Zyrtec, which controls about one-quarter of the market, products for the ever-popular obesity surgery and the widely-advertised One-Touch Ultra diabetes testing system.

While J&J has no “blockbuster” drugs in the wings, its drug pipeline is perhaps the most robust in company history and it is on track to seek approval for up to 10 new drugs between now and 2010.

It also helps that the company has had no exposure to the devastated subprime market or banks and financial institutions that have fallen victim to the credit crisis (J&J still has easy access to short-term loans at attractive interest rates and extensive lines of credit, which it has not had to use since it has money in the bank).

With highly diverse product lines and robust cash flow, J&J is well-equipped to stand strong through thick and thin.

Equity Residential
With banks becoming more reluctant to lend money, real estate investment trusts (REIT) may at first glance appear to be bad buys during a downturn, since REITs rely on bank loans to fund new projects (apartment blocks, office buildings and shopping malls).

But despite the economic slowdown, residential housing slump and credit crunch, commercial real estate has overall shown some strong operating fundamentals with comparatively low loan delinquencies.

Equity Residential (NYSE:EQR) is the second largest owner and operator of multi-family, apartment complexes in the United States, with over 165,000 units in over two-dozen states. The Chicago-based REIT company focuses on acquiring and operating apartments in high growth population areas such as New York, Los Angeles and Seattle.

Failing housing markets have left larger numbers of would-be homebuyers living in their apartments, which has resulted in solid rental rate growth for EQR. The company has continually raised rents in most of the markets in which it operates, pushing up revenue and net operating income growth in its portfolio.

EQR has relied on regularly disposing of housing assets in lower growth areas to focus on its target high-growth markets. In addition, EQR’s large development pipeline should incrementally add to earnings as projects come on line.

Having one of the strongest balance sheets in the industry, the financial position of the company is further bolstered by the fact that it has $145 million in cash, low leverage (liabilities as a percentage of assets), no looming debt burden and a Fitch long-term credit rating of ‘A-’.

Sounds like a safe bet.

Quality Systems Inc.
As investors batten down the hatches and seek out shelter in so-called recession-resistant stocks, health care continues to be a favorite safe haven. Health-care IT specialist Quality Systems Inc. (Nasdaq:QSII) is the perfect example of a medical-oriented company that has maintained good financial health during lean times.

NextGen, its largest division, which accounts for more than 90% of the company’s revenues, increased its profits by 34% in the latest quarter, helping propel the stock to new 52-week highs. Considering more than two-thirds of U.S. doctors still use paper records, Quality Systems is sitting on a potential gold mine for its health care information systems that automate medical and dental group practices.

Since President Bush last year announced a push for every American to have an electronic health record (EHR), the government loosened federal rules that make it easier for heath care facilities to receive subsidies to purchase EHR systems. As more hospitals, community health centers and other healthcare organizations make the switch to electronic records, the company will continue to see its NextGen3 proprietary medical records software and practice management systems fuel more growth.

With the prospect of above-average growth and the safety of an almost 3% dividend yield, the Irvine, Calif.-based maker of medical and dental software appears to be a virtual fortress that will easily outperform the market.

Kinder Morgan Management, LLC
Don’t let the fact that Kinder Morgan Management, LLC (NYSE:KMR) is an Enron spin-off frighten you. KMR’s long-term corporate credit rating is an investment-grade “BBB” with Standard & Poor’s.

This one of the largest midstream energy companies in the United States, KMR provides natural gas distribution service to over million customers nationwide. It operates more than 43,000 miles of natural gas and products pipelines in 26 states that transport primarily natural gas, crude oil, petroleum products and carbon dioxide, and approximately 165 terminals, many strategically situated on inland water ways, that store and transfer refined and unrefined petroleum products like gasoline and coal.

The energy transportation and storage outfit has a few things working in its favor: it tends to do business on a contractual basis, so earnings don’t fluctuate as much as its competitors who get paid based on the volumes they ship; the firm is less exposed to crude oil price swings than pipeline companies with petroleum processing operations and interests; and its broad portfolio of gas pipelines and storage assets further insulate it from the bouts of volatility that plague less diverse players.

KMR recently raised its quarterly cash distribution by 16% year-over-year, a move that Morgan Keegan analyst J. Michael Drickamer says sends a positive message that distribution growth is intact.

While not immune to risk of a downturn, KMR is well positioned to ride out the storm.

Shannon Roxborough
Analyst, Wall Street Elite