When a recession hits, especially as hard as this one has, the last investment you want to make is in financial stocks. This would be true even if banks and mortgage companies hadn’t been at the center of the maelstrom. You want to increase your portfolio exposure to hard assets in difficult times. These are assets that retain their value over time. Yes, they may fluctuate in value during the recession, but when the sky clears, they will retain more value than other investments and have even more upside ahead.

Oil is the most important of these assets. It’s a good idea to hold oil producer stocks anyway, but you need increase them even more in a recession. [Read: The Best Stocks to Hold Forever] Gold has also worked very well this time around, but that hasn’t always been the case.

Diamonds are another way to go. But before learning about a great stock involving diamonds, it’s important to know how the diamond market works.

First, diamonds are actually not intrinsically valuable. Clever marketing by London-based DeBeers created the diamond myth — that it is a precious and valuable jewel. Operating for decades as a near-monopoly, DeBeers also instituted onerous supply controls. By pumping up demand and restricting supply, DeBeers created a precious hard asset out of worthless carbon. That situation still exits today.

That takes us to Harry Winston Diamond (NYSE: HWD). Rather than simply own a retailer like Tiffany & Co. (NYSE: TIF), which is highly dependent on discretionary consumer spending, Harry Winston not only sells diamond jewelry — but it also owns a 30% stake in a world-class Canadian diamond mine. Given that many diamond mines are in unstable war-torn nations in Africa, this kind of stability is very big for Harry Winston.

Right off the bat, ownership stake in the mine allows Harry Winston to provide Tiffany with $50 million worth of diamonds each year, so that’s money in the bank before any fiscal year even kicks off. The other advantage is that the company can turn the diamond mining spigot on and off in response to demand (demand has been weak the past two years). That allows Harry Winston to better control what it spends on capital, since it costs a lot to mine diamonds.

The retail operation is not as great as I’d like it to be, but the company brought in a new retail operations president, and he’s positioning the company for +20% revenue growth going forward and aiming for 15% gross margins. His plan is to introduce new products such as watches and bridal lines, and to reposition the Harry Winston brand. A look at the company’s conference call will provide more detail, but this should be a big boost for the company going forward and add to the bottom line.

The company’s financials are in great shape, with $125 million in cash offset by $265 million in long-term debt, and interest expense easily being met by operational cash flow — even in these difficult times. And actually, they aren’t even as difficult as they were a year ago: Sales were up +62% year-over-year in the most recent quarter, coming off an +89% increase in volume. This wasn’t just limited to Harry Winston, either — the entire industry appears to be rebounding.

Action To Take –> It’s hard to believe, but at the height of the panic in March of 2009, Harry Winston was trading at only $2 per share, well-below what its tangible assets were worth. Today the stock sits at just above $12, but book value is at $9.05. Right now, the stock represents a chance to own a premier hard asset, combined with an improving retail business, for just slightly more than the value of the assets.

With diamond production increasing and consumers returning to stores, a +20% annual increase in earnings is very possible going forward. I see Harry Winston trading above $20 within five years, plus investors have a hard asset to buttress their portfolio. It’s a buy.

P.S. — Over the past few weeks we’ve been telling you about an opportunity to protect yourself from the coming tax hikes. Have you taken action yet? If not, here’s what you need to know to get started.