3 Strong Stocks for a Weak Market

Stocks saw a pretty big decline last week, with the S&P 500 falling 2.6 percent and the Nasdaq Composite falling 3.1 percent. However, the decline is not universal. There are several stocks that are holding up just fine, and even breaking out — they are of more defensive companies that will not see a significant earnings decline in a recession. Investors who are concerned that the market may continue to fall should consider taking positions in these names.

Source: Thinkstock

1. McDonald’s (NYSE:MCD)

Shares in the world’s largest restaurant chain rose 1.44 percent on the week, and they are outperforming the S&P 500 this year by about 4 percent. While the market was flying high last year and investors flocked toward growth stocks, they sold shares in this company to do so. As a result, McDonald’s shares spent 2013 consolidating. Nevertheless, the company has been providing investors with stable earnings, a nice 3.25 percent dividend, and a modest yet effective stock repurchase program.

With investors looking to retain their equity exposure in a weak market environment, they will flock to names such as McDonald’s. It’s not going to soar, but McDonald’s stock is a good place to store your wealth until bargains begin to arise in the higher-growth names that have been dragging the market lower.

Investors looking to take a position should note that the stock’s 50-day moving average is about to cross above its 200-day moving average, which is very bullish. This price point, about $96.25, is also a reasonable entry point, with the shares currently trading at $99.29.

2. Entergy (NYSE:ETR)

In a weak market, investors often flock to utility stocks for safety and yield. Not surprisingly, this sector has been the best performer in the S&P 500 in 2014 after underperforming in 2013. Investors can buy an exchange-traded fund such as the SPRD S&P Utilities ETF (NYSEARCA:XLU). But there is more opportunity in individual names.

Entergy has been an underperformer for several years, and it appears to be breaking out of a consolidation phase. It is performing much better than the S&P 500 this year, with shares up 11 percent. Last week, when the market fell, Entergy shares rose nearly 2 percent.

As a utility, it faces a lot of government regulations, including rate controls. The utility industry is also very capital intensive. As a result, the company has seen weak profit figures, and investors were unimpressed. But earnings are expected to rise this year. Furthermore, the stock trades at just 13 times 2014 earnings estimates and pays a 4.7 percent dividend, which is extremely high in this low-rate environment.

With the stock performing so well this year, it makes sense to wait for a correction before taking a position. There should be support at about $68 per share, which is $2 below the current $70 pricetag.

3. Royal Gold (NASDAQ:RGLD)

Investors looking to avoid market weakness should own some gold, and the safest way to do so without buying the actual metal is to buy a royalty and streaming company such as Royal Gold. Royalty and streaming companies make deals with mining companies that give them the right to purchase a certain amount of gold at an agreed-upon price. The mining company gets capital it needs to develop its mines, and the royalty company gets leverage to the gold price and upside potential if the mining company finds more gold at the mine.

Royal Gold recently saw its initial gold payments from its largest streaming agreement with Thompson Creek Metals (NYSE:TC) on its Mt. Milligan mine. This project is going to send Royal Gold’s cash flow soaring. Furthermore, the company recently made a new deal with Rubicon Minerals (AMEX:RBY), which is now in the process of building its Phoenix gold mine in Canada. Given the company’s newfound cash flow, its already strong capital position, and the fact that small gold mining companies need capital to build their mines, I suspect we will see more deals in the near future.

Royal Gold shares are up over 40 percent this year, and they rose over 2 percent last week, during the market decline. Given this strong performance, investors may want to wait for a pullback. The stock recently found support in the low $60s, and so that’s where I would consider taking a position.

Disclosure: Ben Kramer-Miller is long Royal Gold.

More From Wall St. Cheat Sheet: