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4 stocks to build earnings in a slow market recovery

We have a lot of hopes for 2014 to be a year of more economic recovery, and hopefully shake off the last effects of the GFC. The US market is hitting new highs, but the valuations aren’t too far out of whack to say it’s a bubble, and China is switching from heavy industry and infrastructure to more consumerism and urbanisation.

What does Australia have to look forward to?

Our outlook seems to be slower growth over the next few years as non-resources industries have to produce more business and earnings to offset the lower capital expenditures of mining. The housing market usually kicks off the business cycle, but the question is, how much of an influence will filter through the economy if less money is flowing through the system?

With that in mind, investors should be preparing positions in companies that individually have good growth prospects, and just to be on the safe side, once again look over some of the better defensive stocks if this slow growth period does last another 3-4 years.

Defensive stocks are those companies that will still do brisk business even in economically slow times.

Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) match this description well because people have to shop for basics. They open new stores in new housing development areas, so they will benefit from the housing market rise, too. They should keep growing at least at the rate of population growth.

As for the individual growth story stocks, Domino’s Pizza Enterprises (ASX: DMP) should have stable sales growth in slower economies, and when things heat up, many people buy even more pizza without trading up to too many other product substitutions.

In 2009, Domino’s share price was about $3, and it closed at $15.44 yesterday- up 5 times in 4 years. That’s a lot of dough even for a pizza maker.

In retail land, Super Retail Group (ASX: SUL) covers items like car accessories, sporting equipment, outdoor equipment and apparel, so its goods are what people generally buy in relatively comfortable price ranges.

You may not go out and buy a shiny new fishing boat, but you can pick up your fishing gear and a few eskies for your next outing.

When I asked the group managing director and CEO Peter Birtles if he expected sales to improve if consumer sentiment turns up, he replied, “If consumer sentiment were to pick up, Super Retail may not be an immediate beneficiary of that, because it has already been doing well since the personal spending style trend already matches the goods that it sells.

Foolish Takeaway

Diversifying your portfolio for growth and for a rainy day is the best way to smooth out extreme changes in returns.  Analysts and market pundits aren’t always right. Build up that defensive position for base earnings and have those several growth stocks to protect and grow your capital.

Safeguard your capital

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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