From early April to early May, small stocks fell about 6 percent. Technology stocks, which had been leading the market this year, dropped about 5 percent. And large stocks, usually the most stable, declined more than 3 percent. Suddenly, investors were thinking about how to make their portfolios a little safer.
Two characteristics that help stocks hold up better in declines than the overall market are low debt and an above-average dividend yield.
If you want to stay in the stock market but take a conservative approach, here are five stocks to consider. Each of them has debt equal to 10 percent of stockholders' equity or less, putting them among the best quintile of stocks in that regard. And each has a dividend yield of at least 3 percent, which ranks in the top quartile.
Among the 3,000 stocks with a market value of $250 million or more, only 46 met both criteria as of May 4. The five I am recommending are ones that I believe are particularly appealing.
Chevon Corp. (CVX), which owns the Chevron and Texaco brands of gasoline, is the sixth largest corporation by market value, and the second largest oil company, after Exxon Mobil Corp. I own Exxon personally and for clients, but Chevron is probably more defensive, as its dividend yield is a little higher than Exxon's and its debt-to-equity ratio is a little lower.
For the oil behemoths, the biggest challenge is growth. Oil in quantity can increasingly be found only in inhospitable places. The deeper the water, or the more frozen the tundra, the more expensive it is to get oil or gas out of the ground.
Chevron stock is steady as a rock. It has shown gains in 18 of the past 20 years. In 2008, when the stock market declined 17 percent, Chevron fell only half as much.
Second, I recommend Superior Industries Inc., best known as a maker of aluminum car wheels. The Van Nuys, Calif., company also makes other parts. It is debt free and carries a 3.8 percent dividend yield.
Superior is a low-price way to invest in the auto industry's ongoing recovery. Every month this year, auto and truck sales have run at an annualized pace of 14 million vehicles per year or better. By contrast, carmakers sold barely over 10 million vehicles in 2008, the worst year of the recession. The best year ever was 1999, when close to 18 million new vehicles hit the road.
Superior is a cheap stock. It sells for less than book value, 0.5 times revenue and seven times earnings.
Third, I recommend J2 Global Inc., which calls itself a "cloud-based communications" company. The Los Angeles company offers online faxing, voice communications over the Internet, email hosting, email marketing and online data backup.
J2 Global has been profitable in each of the past 10 years, with rising profits in eight of those 10 years. Both 2010 and 2011 were record years for the company. Also, j2 is debt-free. The stock seems reasonably priced to me at 11 times earnings, with a 3.3 percent dividend yield.
Fourth, I fancy Cato Corp., a retailer of lower-priced women's clothing, mainly in the Southeast. Its two main brands are Cato and It's Fashion, but it also uses variations on those names.
Cato, based in Charlotte, has a subspecialty in large-size women's clothes. Like it or not, Americans are getting heavier. That could bode well for Cato's specialty.
The company is debt free and offers a 3.3 percent dividend yield. The stock sells for 13 times earnings and a little less than 1.0 times revenue. That's pretty cheap for a company that reported record earnings in each of the past two fiscal years.
Don't laugh, but my final pick is World Wrestling Entertainment Inc. (WWE), a small company based in Stamford, Conn., that runs highly scripted wrestling extravaganzas. The organization is expert at creating the personae of heroes and villains that fans love to root for, or hate.
One problem is that regular shareholders don't have voting control. A special class of voting stock gives effective control to Vince McMahon, the chairman.
WWE stock has not given most shareholders capital gains for about a decade. But it pays a dividend of more than 5 percent. The company is debt free. And the fan base seems loyal and enthusiastic.
These stocks aren't guaranteed to hold up if the market falters. Nothing is. But I believe they should have some ability to play both defense and offense.
