The best way to protect your portfolio in a downturn is to invest in companies that are immune to wider market trends, such as global engineering and defence business Meggitt (LSE: MGGT).
Meggitt designs and manufactures high-performance components and sub-systems for aerospace, defence and other specialist markets. So as long as it can maintain its reputation for quality, the firm’s relatively immune to global economic issues.
Unfortunately, the company has recently been hit by weakness in the energy market, but strength in other divisions has offset this. According to the group’s full-year 2017 results, organic revenue grew by 2%, with 4% growth in civil aerospace and 1% in military partly “offset by continued weakness in energy.“
Management has also been taking other actions to further improve its outlook in this downturn, including cutting costs, which helped improve the underlying operating margin by 10 basis points to 19.2% in 2017. Pre-tax profit for the full-year expanded 34% to £262m and free cash flow also improved by 42% to £186m, allowing Meggitt to further reduce its net debt (now at 1.9x EBITDA) and increase its full-year dividend by 5% to 15.9p.
Full steam ahead
Heading into 2018, a positive CEO Tony Wood said today: “Following organic order growth of 6% in 2017, we expect these trends to continue into 2018, with expected revenue growth of 2% to 4% and continued operating margin improvement.”
Still, City analysts are not expecting much in the way of growth this year. But following today’s figures, there’s a strong case to be made that Meggitt can beat analysts’ targets for 2018 (they’re currently expecting earnings per share growth of only 2%).
With this the case, shares in Meggitt currently appear undervalued as they trade at a forward P/E of only 13.2, falling to 12.9 based on estimates for next year. In addition to this low valuation, the stock also supports a dividend yield of 3.4%, covered 2.2 times by earnings per share.
However, if you don’t like the look of Meggitt, another company I believe can continue to produce steady returns for investors in any environment is Ferrexpo (LSE: FXPO).
There are two key reasons why I like this iron ore producer. Firstly, the shares are cheap and secondly, the company has a record of returning any excess cash to investors. Indeed, according to current City forecasts, shares in the firm are currently trading at a forward P/E of just 8 and are set yield 6.4% for 2017 (including the final distribution which is yet to be announced).
But Ferrexpo is also relatively exposed to the global economic environment. If growth starts to splutter, the price of iron ore will most likely decline. That said, the company is relatively insulated against any iron ore price declines as 95% of its production is high-quality ore with an iron content of 65% or more. This high-end product tends to attract a higher selling price allowing Ferrexpo to achieve sector-leading profits when prices are high, and remain profitable when prices slide. For example, based on trailing 12-month figures, Ferrexpo’s operating profit margin is 39.2%, compared to the mining industry median of 7.5%.
Based on these numbers, I am confident that this one miner that can continue to produce returns for investors in all market environments, making it one of the best stocks to buy in a slump.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Meggitt. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.