On Monday, March 9, investors will celebrate the sixth anniversary of the current bull market. After a brief pullback in January, the S&P 500 and Dow Jones Industrial Average have resumed their upward move and are now far above previous peaks.

 

#-ad_banner-#Even the tech-heavy Nasdaq is almost back at levels seen during the dot-com bubble of 2000.  

 

Yet while many portfolios have staged an impressive rebound, consumers’ balance sheets have not. By one measure, more than a third of the population is at high risk of a personal financial crisis.

 

Nearly a quarter (24%) of Americans have more credit card debt than emergency savings, according to a recent report by Bankrate, a financial publisher. Another 13% have no credit card debt, but also don’t have any emergency savings either. That is 37% of the population that would be thrown into severe financial stress were they to lose their employment or another recession were to occur.

 

Those approaching retirement may be even worse off. As I wrote in December, many investors may be unable to live on the traditional 4% withdrawal rule.

 

While the U.S. economy has been the success story among global peers, it hasn’t exactly boomed higher either. Lower oil prices threaten to slash profits in the energy sector, and weakness in commodities is pushing expectations lower for agriculture and mining as well. Consumer spending in the United States barely budged in January despite the 40% decline in gas prices since June.

 

I am not predicting an imminent recession, but such downturns are eventually inevitable, and many people are already on the edge of the financial precipice.

 

It is hard to predict how poor financial preparation by a third of Americans will play out. Will the government have to react with more social programs and higher taxes to pay for it all? Will extended families have to pick up the slack, taking on permanent house guests?

 

The only thing we know is that the scenario could mean a new financial reality for many. Even if it will not directly affect your life, it will affect your portfolio. The question is: how do you prepare for this new reality?

 

Winners In The New Financial Reality
History has shown that some types of companies would benefit from weak household finances. In fact, while it took the S&P 500 more than five years to reach its 2007 peak after the financial crisis, the companies below benefited from the weak economic picture and quickly recovered.

 

To find such companies, you need to think about incomes. Wage growth has barely kept up with inflation and many are already living paycheck to paycheck. Were a new recession to occur and unemployment to move higher, even more could join the growing crowd that depends on payday lenders on a regular basis.

 

These lenders provide cash advance services, often at astoundingly high interest rates. The practice is considered to be predatory by some, but is much better than the dangerous alternative with loan sharks.

 

Cash America International, Inc. (NYSE: CSH) operates more than 700 sites across America offering secured pawn loans and payday check-cashing services. One measure of this company’s fiscal health: the board of directors authorized the repurchase of up to four million shares, 14% of shares outstanding, earlier this year and increased the quarterly dividend by 43% to $0.05 per share.

 

Low levels of savings means that many households will need to lease or borrow funds to acquire items such as furniture and electronics. That could provide a strong boost to rental stores like Rent-A-Center, Inc.  (Nasdaq: RCII). The company provides rental and rental-purchase plans at roughly 3,000 stores.

 

Shares plunged 14% in early February when the company delivered Q4 profits of $0.50 a share, which was roughly 20% below consensus forecasts. That shortfall masked the fact that same-store sales grew 28% over the prior year’s quarter.

 

Management projects roughly 6% sales growth in 2015 and earnings of between $2.05 and $2.30 per share. That puts the shares at 12-to-13 times forward earnings, along with a 3.5% dividend yield. Rent-A-Center has also been an active acquirer of its own shares, cutting the share count to a recent 53 million, from 70 million in 2007.

 

The worst case scenario for many households will be missed payments on loans and debt consolidation strategies. Encore Capital Group, Inc.  (Nasdaq: ECPG) purchases portfolios of defaulted consumer loans at a steep discount and manages collections. Encore Capital also buys property tax liens, which are secured by real estate.

 

The company has operations in the United States, the United Kingdom, Colombia and Peru, with 71% of 2014 sales attributable to U.S. operations. Encore reported a 15% increase in 2014 per share earnings to $4.34 on a 39% spike in revenue (to $1.07 billion). With 31% of the shares sold short, the stock could be primed for a massive short squeeze.

 

Risks To Consider: As long as the market heads higher and the jobs picture continues to improve,  Americans may be able to put off the day of financial reckoning. While there are reasons to believe the economy may hit a speed bump, such an event may take several years to play out.

 

Action To Take –> Prepare your portfolio for the next financial crisis with these companies. They do well when household finances weaken. The current poor financial preparation by American households points to higher use of these companies’ services in the future.

 

No one knows when the next market downturn will be, but that doesn’t mean investors should get scared out of the markets. StreetAuthority’s premium newsletter, Total Yield, uses two criteria to find the world’s safest companies. Not only has the strategy returned an average of 15% per year since 1982, but it’s outperformed the S&P during the “dot-com” bubble and the 2008 financial collapse too. To learn more about his “Total Yield” investing strategy, click here.