10 stocks for financial Armageddon

By Jim Jubak

You've paid the tuition, so I hope you are paying attention.

The 5%-plus drop in the Dow Jones Industrial Average ($INDU, news, msgs) and the Standard & Poor's 500 Stock Index ($INX, news, msgs) that started on Feb. 27 is a lesson in how long-term investors can make low-risk profits in what will be an increasingly risky market in the future.

The problem, as I laid it out in my March 9 column, is that every day that goes by without letting the steam out of the global financial market -- brought to a boil by an excess of cheap capital and even cheaper debt -- raises the odds of a financial market Armageddon.

(Since a number of you have e-mailed to ask what I mean by Armageddon, I say Armageddon is in the eye of the beholder. To me, if a 10% drop is a correction, a 30% fall in stock prices is Armageddon. And before you pooh-pooh that number as just another crash, remember that if Armageddon is driven by the debt markets, the damage would be worse on that side than in the stock market.)

Of course, we don't know the date of that blowup. If we were certain it was tomorrow, all we'd have to do is move to cash and sit it out. But the blowup could be years away, so in order to have any chance of reaching our financial goals, we have to stay invested despite our fears.

Fortunately, the Feb. 27-March 5 market sell-off gives us some clues. Some stocks fell much harder than the market as a whole -- and some did much better. By studying the stocks that either went up when the market went down -- and there are a few -- or that held their price better than the general market, investors can find patterns that tell us what kinds of qualities this market values most.

Boil down that lesson to a few stock picks, and you have the topic for today's column: 10 stocks to own while waiting for financial Armageddon -- and which also will produce the returns you need even if Armageddon never comes.

The best way to explain that is to show you some examples of patterns of value that I've found after studying the sell-off in the U.S. and other stock markets. So without further ado, here are my 10 for Armageddon:

Armageddon Group No. 1:

The cream of the cream of consumer blue chips. Yes, this is Investing 101, but I don't see any reason to turn up my nose at a strategy just because it's so well known. It works. This most recent downturn proved it -- again.

• When the going gets tough, the not so tough run for the safety of consumer blue chips like PepsiCo (PEP, news, msgs). It's likely we'll all be drinking Pepsi and munching Frito-Lay snacks as the world comes to an end. That's why PepsiCo shares were down just 3% when the market fell by 5%. The upside isn't bad on a stock like this either: 10.7% a year over the past 10 years.
• Let me give you a second well-known name that fits this category: Procter & Gamble (PG, news, msgs). The stock fell just 3% during the market's drop, and shares have returned 11.3% on average for the past 10 years.
• A third name, Kellogg (K, news, msgs), has been on fire since the middle of 2006 and dropped just 2% in the recent sell-off. The stock's 10-year average annual return is a relatively low 6.9%, but the five-year number of 13.6% is more indicative of the period ahead.
• My fourth name, Stryker (SYK, news, msgs), is less well-know than PepsiCo, Procter & Gamble and Kellogg -- maybe because it makes artificial hips rather than potato chips -- but the performance is even more attractive: down just 2% in the sell-off and up 22.5% annually on average for the past 10 years. I'd argue that the five-year return of an average 13.8% is more what investors should expect going forward.

All four of these stocks are members of my long-term 50 Best Stocks in the World portfolio and belong in an Armageddon portfolio.

Armageddon Group No. 2

Must-own growth stocks. You don't have to give up all growth stocks to play it safe, my study of the recent sell-off suggests. Oddly enough, a few growth stocks, which should have been more volatile than the blue chips I've noted above, weren't.

• Apple (AAPL, news, msgs), for example, went down just 2% in the period when Procter & Gamble fell 3% and the market 5%. Contrast this performance with that of another technology growth stock, Cisco Systems (CSCO, news, msgs), which fell 7%, more than the market indexes.
• Expeditors International of Washington (EXPD, news, msgs) is another growth stock that behaved surprisingly well. It dropped 3%. C.H. Robinson Worldwide (CHRW, news, msgs), another freight forwarding stock and one that had outperformed Expeditors International in January and for most of February, dropped 5%.

I've got a theory on why stocks such as Apple and Expeditors International didn't fall as much as their growth-stock brethren. Some growth stocks have such strong growth stories and have delivered such stellar returns that they have a big pool of investors just waiting to jump in and buy on the slightest dip. So any pullback, rather than scaring investors out and leading to a bigger drop, brings in new money, supports the price and leads to less selling by existing shareholders.

Apple fits that pattern: The stock has huge mind share among investors and has delivered an average annual return of close to 100% for each of the past three years. With the iPhone due out this summer, individual investors who missed out on that performance are looking for the slightest chance to get in. Expeditors International is less well known to the mass of individual investors, but the shares are a growth-stock superstar with a legion of fans. Average annual return has been 29% over the past three years and 31% over the past 10 years. I'd add both of these to my 10 stocks for Armageddon portfolio.

Armageddon Group No. 3

Debtors with improving prospects of paying it all back. If you're willing to put up with some short-term volatility, meaning the stock could go down a fair bit, you can pick up a lot of long-term gains by buying shares of companies with big debt and -- this is crucial -- the future cash flow to pay it down and raise the companies' credit ratings. My two picks in this group for the Armageddon portfolio are:

• Companhia Vale do Rio Doce (RIO, news, msgs), the Brazilian iron and nickel miner that just took on a truckload of debt to buy Canadian nickel producer Inco in a $19 billion deal, fell 14% in the recent market drop, about in line with the 13% decline in the Brazil ETF iShares MSCI Brazil (EWZ, news, msgs).
• Canadian oil sands player Canadian Natural Resources (CNQ, news, msgs), which is leveraging up -- debt-to-equity ratio is now 1.03 -- to expand production, and which fell 5% in the dip.

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