We pick five shares that should come out of the recession strongly.
During economic downturns, the sensible investment opinion turns to defensive shares with good dividends, and you've heard plenty of Fools going on about Tesco (LSE: TSCO), Vodafone (LSE: VOD) and the like.
But what about those companies that can handle cyclical swings just fine, and are capable of coming out strongly in the next upswing? Here are five that I think fit the bill and will be well ahead in another five years' time.
MITIE Group (LSE: MTO) is one I've liked for a while, having last written about the company in May on the occasion of its annual results release. Since then, the share price has put on 20% to reach today's 267p, so why do I think they're still cheap?
In recent decades, we've seen something of a move to outsourcing, which makes a lot of sense -- why spend your resources doing your own catering, site management, security and so on when your expertise lies elsewhere, and there's an expert who can do it better and cheaper?
The shares are on a March 2012 P/E of 12 with a dividend yield of 3.6%, moving to 11 and 3.8% for 2013. Those dividends are very well covered. And the estimates for this year and next are assuming, almost certainly correctly, that we'll still be in tough times.
But if MITIE can keep profits growing right through these depths, with decent forecasts, how well will it do when things pick up? Very well, I reckon.
Mining shares have fallen out of favour of late, as the wheels have come off the commodities bandwagon on falling prices and fears of a Chinese slowdown.
So we're in a bit of a slump, and the fastest-growing economy on the planet has slowed down a bit. But demand for finite resources can only go up in the long term, and five years from now, prices of iron, copper, aluminium, coal and all those other minerals will be significantly higher, and so will the shares of the world's major miners -- well, that's my prediction, anyway.
So which one? I'm going to plump for Rio Tinto (LSE: RIO). Despite a recent upwards blip, its share price has fallen this year and lagged the FTSE by quite a bit, and on current forecasts it's looking cheap -- at a few pennies under £36, the shares are on a P/E of only 6.4. The dividend yield is low at 2%, but it's not a dividend pick, it's one where reinvesting profits in future development should bring better rewards.
We should have an operations update today, so we'll see how it goes.
The UK's housebuilders have had a tough time, but things surely can't get any worse now and we must be around the bottom, yes? In fact, only this week, Bovis Homes (LSE: BVS) told us it expects to report a significantly better 2011, and is upbeat about 2012.
But I'm not actually going for a housebuilder, I'm going to stick with the construction and regeneration specialist Morgan Sindall (LSE: MGNS), which I picked back in August. Since I rated it a 'buy now' share, the price has dipped further and then recovered, and is now around 5% up at 627p. All the reasons I liked the shares then -- low forward P/E, high dividend, no debt problems and great potential come the upturn -- are still there.
The aerospace and defence sector has been hit by defence cutbacks as the country headed into recession, and I think that has given us a great opportunity in BAE Systems (LSE: BA). Its share price lost around 50% from its end of 2007 peak, but has perked up a bit of late, which is a good sign, and I think it has a fair bit further to go over the next few years.
Forecasts for December 2011 indicate that the current price of 305p puts them on a P/E of only 7.5 with a dividend of 6%. And although earnings per share has been up and down a bit over the past few years, it's a well-managed cyclical business and the well-covered dividend has been growing at around 10% per year.
And there's very little debt. It's a company that's coming through the downturn just fine and should be well ahead in another five years.
Hedge funds are way off the popularity radar right now, and the UK's largest, Man Group (LSE: EMG), has seen its share price plummet -- it's lost 65% in the last 12 months alone. I've written about Man Group before, and only last week my colleague David Holding was waxing lyrical about it.
As David said, forecasts vary widely, so while for most companies they are to be treated with caution, here we should probably think of them as wild stabs in the dark.
But still, we're at a time when funds under management have fallen, and the tiered-fees approach is not working at its best. But when the economy picks up and investments in general start to do better, and more people have more cash to stick in hedge funds, that fee structure stands a pretty good chance of coming good.
Would you buy any of these five? Do let us know in the comments section, below.
> The Fool's latest report has just been published! Make sure you don't miss '10 Steps to Making a Million' -- it's free!
More from Alan Oscroft:
> The Motley Fool owns shares in MITIE Group and Tesco.