Stocks

HAVING A CALM

, safe, stable place to park money sounds awfully nice especially in these days of high inflation, suspect economic growth and stock market schizophrenia. But it turns out that investors can't indiscriminately buy a sector that sounds slowdown-resistant and call it a day.

Yes, health care, utilities and other so-called defensive industries generally hold their value when the U.S. economy staggers and the broader market falls apart. But not all these stocks move in lockstep. During each of the economic slowdowns the U.S. has endured in the last 40 years, one or two smaller industries within each of those broad groups have excelled beating not only the broader market, but their own sectors. These minigroups are the real safe havens.

We dug through research spanning five decades to see which sectors perform best when the economy is staggering. That led us to utility companies, health-care firms and manufacturers of consumer staples. But then we went deeper, aiming to figure out which smaller groups within those sectors had the best business outlook, strongest balance sheets and fewest potential election-year political obstacles. We found seven ports of call that might provide some calm during this ongoing financial storm; three of them are featured here.

MEDICAL PRODUCTS

These days, some health-care firms face obstacles even more menacing than a recession. The leading presidential candidates of both parties aim to change the U.S. health-care system, and managed-care companies and giant pharmaceutical firms could feel the impact. Big Pharma, meanwhile, still hasn't overcome worries about a dwindling drug pipeline. So we zeroed in on companies whose products and services give them some immunity from those pressures.

Wilmington, N.C.-based Pharmaceutical Product Development runs clinical tests for drugmakers letting them outsource research so they can save money on replenishing their drug pipelines. At 22 times this year's expected profits, the stock is not cheap. But many analysts think PPD has an advantage that rival research firms don't. Increasingly, it's teaming up with companies to develop compounds for drugs rather than just testing them. The company expects total profits for 2008 to rise 35 percent, to $222 million, or $1.83 a share thanks to two large, one-time payments for its drug-compound collaborations. PPD hasn't produced a blockbuster yet, but that payoff might come relatively soon: In January Japan's Takeda Pharmaceuticals filed for regulatory approval of a diabetes drug it developed with PPD.

NATURAL GAS UTILITIES

In inflationary times, utilities can pass along any commodity-price increases to their customers, boosting total revenue and protecting their profit. Natural gas utilities in particular could be the big winners in the current inflation sweepstakes. Since natural gas is cleaner to burn than oil and coal, demand for gas-generated power is on the rise.

Sempra Energy owns two of the nation's largest natural gas utilities, which together fuel 7 million homes and businesses in Southern California. Sempra earned $513 million in 2007 from its utility operations, up from $460 million a year earlier. But most important for the San Diego-based company, the cash from Californians provides it with the money to pursue other businesses that are far more profitable particularly delivering natural gas to areas that don't have it. Sempra is spending billions to open liquefied natural gas terminals in California and Louisiana. The company also has teamed up with two other companies on a $4 billion pipeline moving fuel from the gas-rich Rockies to the gas-deprived Northeast. Sempra's liquefied-gas and transport businesses lost a combined $207 million in 2006 but made $18 million last year as their new projects started opening.

EVERYDAY SHOPPING

Consumer-staple stocks as a group have more than doubled the S&P 500's return during recent slowdowns. But investors have already piled into Unilever, Procter & Gamble and other staples manufacturers, pushing their price/earnings ratios from the midteens to around 20. The valuations of the retailers where people buy those products, by contrast, are considerably cheaper.

One retailer that may be poised for a good few years is Kroger. Food-price inflation gives the Cincinnati-based company, which operates nearly 2,500 grocery stores in 31 states, considerable pricing power. The company has increased its "forward buying"-paying for goods now even if the grocer won't sell them for several months. That allows Kroger to lock in the current prices; if prices go up later in the year, Kroger can either keep prices lower to attract customers or pass along the higher prices and keep the profits. Analysts expect total sales to rise 5 percent in 2008, to nearly $74 billion, while earnings should reach $1.3 billion, or $1.90 a share, in 2008, up 12 percent from last year.

Mutual Funds

By Russell Pearlman

FINDING A DECENT place to ride out today's market storm isn't easy. Home prices and corporate profits are falling while food and energy prices are rising. The good news is that during each of the last six economic slowdowns since 1969, several so-called defensive industries health care, utilities and others have held their value while the rest of the U.S. economy staggered. You could pick individual stocks yourself see SmartMoney magazine's May cover: Safe Bets, 7 Reliable Stocks for This Market for help with that or you could look for a solid mutual fund to do the work for you. Here are two to consider.

Kent Croft admits it's psychologically toughest to buy stocks when the market is falling and all signs point to even more trouble in the near future. But he thinks an investor can find companies that should weather the bad times and emerge stronger when the good times return. Croft also believes that many companies are in better shape to withstand a recession than in prior downturns. Outside of financial firms, they have less bad debt or other trouble spots on their balance sheets, and profit margins are still high thanks to improvements in productivity.

Based in Baltimore, the $51 million Croft Value fund has stockpiled shares in Johnson & Johnson, a diversified health-care company with a significant amount of its revenue generated from medical products. It also owns Edwards Lifesciences, which manufactures devices that help treat heart disease. Manager Croft also likes insurers such as AIG and Ace Ltd.. "The longer-term view is your biggest aid to get over the paralysis," he says. In 10 years, Croft Value has returned an average of 6.2 percent a year, handily beating the S&P and more than compensating for the fund's above-average 1.5 percent expense ratio.

The Charlottesville, Va.-base Chase Fund started looking for safe havens late last year, dumping much of its tech holdings and buying more of companies that make everyday consumer goods such as Procter & Gamble and McDonald's. The $557 million fund already had a heavy dose of health-care firms such as Baxter and J&J, along with pharmacy benefit managers Express Scripts and Medco Healthcare Solutions. And while the fund lost almost 5 percent this year, it's still beating the Standard & Poor's 500 and more than 90 percent of fellow large-cap growth funds. Over the past 10 years, the fund has averaged a 6.7 percent annual return, more than doubling the S&P 500's performance a bargain considering the expense ratio is just 1.17 percent.