The stock market today is all about one thing: Europe. A European financial crisis of the same variety that hit the U.S. in 2008 will is undoubtedly affecting global stock markets; the U.S. markets are down more than 5% from last week. News over the weekend that the International Monetary Fund (IMF) will aid Italy has markets springing higher. Yet no matter how bad Europe gets, it's doubtful that the U.S. markets will reach March 2009 levels.
Nearly all major U.S. financial institutions are significantly better capitalized than they were in 2008. Plus, any exposure to Europe by U.S. banks pales in comparison to the domestic exposure that they had when Lehman Brothers collapsed. One of the reasons that Goldman Sachs (GS) hasn't been able to expand its profitability is because it isn't taking on risk in Europe. So, as Europe's crisis worsens, the exaggerated price declines in the share prices of many U.S. firms have absolutely nothing to do with the future performance of the underlying businesses.
Therefore, if 2008 was the litmus test, then investors may want to consider the businesses that performed well in 2008. By performing well, I mean those whose share prices performed on an absolute basis -- the stock price generated a positive return when the S&P 500 declined 38%. Very few businesses were able to make this claim. Even MasterCard (MA) a wide moat business that has a resilient business model was down 29% in 2008 (as a point of reference, MA is up 55% year to date 2011 vs. an 8% drop in the S&P 500).
But AutoZone (AZO) is a company that is even more resilient in bad times. In 2008, its shares were up 18%, outperforming the S&P by 50 percentage points. People rely on their cars more than ever in tough economic times to get to work, go to job interviews, and go to the grocery store. Keeping that old car in shape means AutoZone does well. While the company's magnificent growth virtually guarantees that future rates of return will not be as terrific as the past, 2012 will likely be another quality year for AutoZone.
Indeed, as one examines the list of winners in 2008, most on the list share a very common theme: benefiting from a consumer who is moving down the buying ladder. The biggest winner in 2008 was Family Dollar Stores (FDO), which has moved up nearly 40% since then. No surprise that investors such as Bill Ackman and others are investing in FDO while Warren Buffett's troops in Omaha are buying up Dollar General (DG). Despite sitting near a 52-week high, McDonald's (MCD) thrives in this type of environment. The shares advanced in 2008, 2009, 2010, and 2011. Supported by a quality 3% dividend yield and more attractive menu, Mickey D's is comfortable stock to own in tough times.
Canadian insurance company Fairfax Financial (FRFHF) is another 2008 winner that will likely excel in 2012. In fact, the folks at Fairfax are more bearish than most: Not only does the company have nearly 100% of its equity portfolio hedged, but Fairfax also has a derivative bet that deflation will rear its ugly head in future. In 2008, its shares advanced by more than 10%. Shares are roughly flat in 2011.
To be sure, only 25 out of the 500 S&P constituents generated a positive return in 2008. When markets stage a broad selloff, nearly all stocks become perfectly correlated. But given that well-known businesses sitting in plain sight made up many of the winners, investors should take a cue from them while looking ahead in 2012.