If you think the market is a little too choppy right now, or if you think it's due for another dip, counter-cyclical stocks could be the ticket for you. These stocks also come in handy when you have a shorter time horizon and feel there is a chance you will need to take the money out within the next six months to a year. When it comes time to withdraw, you might not have a choice in price. If you don't have your portfolio in order, you could be withdrawing during a dip.
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Think About Demand
First, companies with stable sales will be the essentials. Johnson & Johnson (NYSE: JNJ) comes to mind with a 3.7% dividend yield and a lineup of products that individuals need on a daily basis. These include pharmaceuticals, cleaning and baby care products.
Fitch Ratings affirmed the AAA credit rating on June 28. This rating was maintained across senior unsecured debt, issuer default ratings and subordinated debt. The short-term issuer default rating is still F1+, which also goes for the commercial paper; this is the highest short-term credit rating. Some strengths cited were the 116 basis point increase year over year in earnings before interest, taxes, depreciation and amortization (EBITDA) to 32.38%. The diversified business model, and an expected free cash flow generation of around $9 billion to $10 billion in 2010, also strengthened JNJ's position. (Learn more in What Is A Corporate Credit Rating?)
Building on this, other pharmaceutical names could include Abbott Laboratories (NYSE: ABT), bringing a 3.70% yield, and Merck & Co. (NYSE: MRK) with a 4.6% yield. Merck isn't looking as good with much lower diluted earnings per share of 9 cents as reported in its May quarterly report, which is substantially lower than the 67 cents in the same period one year earlier. Merck's Q1 profit was also lower, dropping from $1.43 billion in the comparable 2009 quarter to $298.8 million in 2010. Even with all of this, Citigroup (NYSE: C) analysts maintain the buy rating on MRK with a target price of $45.
There is no guarantee that your purchase will be a good deal, but to help, you could look for low price-to-book (P/B ratio) values. Citigroup fits this mold. It has a P/B ratio under $1 sitting at 0.76. I wouldn't say that this is a low-volatility stock, but every $76 you spend gets you $100 in book value. (Find out where to turn when looking to invest in a tumultuous market; read Industries That Thrive On Recession.)
In The End
The products these companies produce are not going out of style or being replaced. This is good in tough times, because you can assume a slow and steady cash flow. But when the economy turns around or your time horizon gets a bit longer, you want high-tech and cyclical stocks. If you are looking for stability and dividends, non-cyclicals are the way to go.
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