Investments That Can Provide Calm in a Financial Storm

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.

Wilmington, N.C.-based Pharmaceutical Product Development (PPDI) 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.

Sempra Energy (SRE) 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.

One retailer that may be poised for a good few years is Kroger (KR). 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.