New Money

Forbes published a list of "best recession stocks" today, which were each required to have a positive price change over the two most recent economic downturns (Jan. 1, 2008, to Nov. 28, 2008, and March 1 through Nov. 1 of 2001).

Not surprisingly, the list includes consumer products companies and discount stores:

Church & Dwight Co., a maker of cleaning products and personal care items (it owns the Arm & Hammer brand.) Earnings per share are up 11 percent and sales are up 8 percent over the past year, and analysts expect another 14 percent growth in earnings per share in 2009.

General Mills and Ralcorp Holdings, which both process breakfast cereal and other food items.

Family Dollar Stores, Ross Stores, and Wal-Mart Stores should benefit from more consumers on a bargain hunt.

Buying in bulk will be in vogue, Forbes says, which should benefit BJ's Wholesale Club.

Here's a somewhat bold bet: Paramus, N.J.-based Hudson City Bancorp, which Forbes thinks is the best-managed company in the banking industry.

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Talk about a big payout: Warren Buffett's Berkshire Hathaway just scored $224 million on a bet that Florida would escape major hurricane damage in 2008, according to Bloomberg (okay, technically it expires tomorrow.)

Essentially, Florida doubted its ability to raise money after a hurricane. In exchange for $224 million, Buffett pledged to buy $4 billion in bonds to if the state ran into a cash shortfall. Apparently, Florida's Attorney General thought the agreement was a raw deal for the state, stating that the chance of a serious enough hurricane hitting Florida in 2008 was about 3 percent (it turns out that this year was particularly bad in terms of hurricanes--among the five worst since 1944, per the NOAA--but the damage was mostly in Texas and Louisiana.)

Catastrophe bonds, which also cover natural disasters like earthquakes, aren't always a bad deal for states. According to a Milken Institute report:

Catastrophe bonds make a huge amount of sense, in theory. The cost of Hurricane Katrina was over $65 billion in insured losses alone. And that's a fraction of potential damages: coastal property in Florida is worth $1.9 trillion, compared to just $66 billion in Louisiana and Mississippi, where Katrina hit. Values in earthquake-prone California are, if anything, even higher. What's more, uninsured losses, especially in areas of the world which have recently been hit by hurricanes and the 2004 tsunami, are higher still: globally about 25% of catastrophe risks are insured, and in the emerging markets it's 7%.

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Only six nonfinancial companies hold the highly coveted AAA Standard & Poor's bond rating: General Electric, Johnson & Johnson, ExxonMobil, Automatic Data Processing, Microsoft, and Pfizer.

Now, there's a one-in-three chance that GE could lose that top-shelf grade, as S&P just lowered its outlook on the company to "negative" from "stable" (Still, it affirmed GE's AAA rating.) The warning stems from troubles in GE's finance arm, GE Capital, which has suffered in the credit crunch. S&P expressed concern that the conglomerate's earnings could be worse than expected over the next two years.

So how do companies earn (or lose) that top rating and why all the commotion? Essentially, those with a triple-A rating--the highest rating given--get cheaper access to credit. Investors also use the rating to gauge the risk of investing in the company's debt securities.

Standard & Poor's is just one of three agencies that deal in credit ratings. The other two are Moody's and Fitch (it's worth noting that Moody's affirmed GE's triple-A rating on Dec. 2 with a "stable" outlook.) A credit rating is different from a stock rating, in which analysts issue "buy" and "sell" recommendations. Credit ratings measure how likely companies are to pay back debt, which lets investors know the likelihood of getting their money back. Not surprisingly, AAA ratings generally go to large companies with vast financial resources. But the key is that companies with a top rating don't have to pay high interest rates to draw investments.

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Here are the S&P's 10 Best and Worst Performers of 2008, courtesy of Dow Jones:

Best of 2008:

1) Rohm and Haas Co. (ROH) (materials), up 32.98%. The chemical firm agreed to be acquired by Dow Chemical (DOW) for nearly $19 billion in cash and debt. Rohm and Haas' specialty chemicals has earned it a premium as they are seen as more stable than basic chemicals used in manufacturing. The slump in oil prices has also benefited chemical firms.

2) UST (UST) (consumer staples), up 26.20%. The tobacco and wine manufacturer reached a deal to be acquired by Altria. Tobacco stocks have outperformed as investors seek safe havens and high dividends.

3) Family Dollar Stores (FDO) (consumer discretionary), up 23.14%. The stock of the discount retailer was celebrated as a defensive play in a weak economic environment, and thanks to the firm's prudent money management, it is seen as likely to generate big cash flow in 2009.

4) Amgen (AMGN) (health care), up 24.87%. Boosted by the success of its anemia drugs, Amgen's stock benefited from an overall trend towards biotechnology firms, and being in the health-care sector, a classic defensive play in market downturns.

5) Barr Pharmaceuticals (BRL) (health care), up 23.45%. The generic-drug maker reached an agreement to be acquired by Teva Pharmaceuticals (TEVA) for nearly $9 billion in cash and debt.

6) Wal-Mart Stores (WMT), (consumer staples), up 15.63%. The discount retailer benefited as consumers worldwide retrenched and turned to cheaper alternatives for their basic shopping needs.

7) Celgene (CELG) (health care), up 10.3%. Sales at the biotechnology firm, which specializes in cancer treatment, are expected to top $2 billion this year. Celgene plans to boost sales in European markets and to launch in Australia and Canada. Its blockbuster cancer treatment Revlimid is currently being tested to treat lympocytic leukemia.

8) H&R Block (HRB) (consumer discretionary), up 10%. The tax-preparation services company, posted a narrowing loss for its fiscal second quarter compared with the year-earlier quarter, benefiting from the closure of its subprime mortgage unit.

9) Hasbro (HAS) (consumer discretionary), up 9%. The maker of board games such as Scrabble and Monopoly is benefiting from consumers backing away from video games and expensive gadgets and turning towards cheaper entertainment games.

10) Southwestern Energy (SWN) (energy), up 9%. Even though natural gas prices have slumped, the producer's third-quarter revenue more than doubled as it boosted production by 76%.

Worst of 2008:

1) American International Group (AIG) (financials), down 97%. The insurer, once the world's largest, was bailed out by the government to the tune of $150 billion after nearly collapsing due to its exposure to derivatives linked to bad home loans.

2) XL Capital (XL) (financials), down 93.54%. The insurance giant reportedly put itself up for sale. In November, XL Capital posted a quarterly loss of $1.65 billion due to investment losses and its stake in ailing bond insurer Syncora Holdings Ltd.

3) Genworth Financial (GNW) (financials), down 89.94%. The property and life insurer was hit by investment losses and concerns over its capital. The firm reached an agreement to acquire Interbank fsb.

4) American Capital (ACAS) (financials), down 89.88%. The firm, which invests in middle-market companies, cut its dividend to preserve capital and reduce leverage.

5) ProLogis (PLD) (financials), down 88.49%. The real-estate investment trust flirted with bankruptcy due to its lack of liquidity and highly leveraged position.

6) National City (NCC) (financials), down 87.65%. The Ohio bank agreed to be acquired by PNC Financial Services for $5 billion after lack of liquidity forced it to consider filing for bankruptcy.

7) Liz Claiborne (LIZ) (consumer discretionary), down 86.73%. After its capitalization sank amid a worsening environment for all retailers, the apparel maker was replaced in the Standard & Poor's 500 index, accelerating a slide in its shares.

8) Wachovia (WB), (financials), down 85.06%. Crumbling under writedowns of bad assets, the bank agreed to be acquired by Wells Fargo Co. (WFC).

9) Developers Diversified Realty (DDR) (financials), down 84.57%. An other real estate investment trust, which has seen its situation deteriorate amid a worsening economy and tight credit markets.

10) Hartford Financial Services Group Inc. (HIG) (financials), down 81.80%. The life, property and casualty insurer saw its shares sink on concern it could run out of capital and be unable to back up its insurance policies.

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