Buy Recession-Proof Vice Stocks: Simon Baker

"Gambling, smoking, and eating Big Macs. That's the theme," says Simon Baker, CEO of Baker Avenue Asset Management. It sounds like a line from a country music song, but it's actually an encapsulation of the hedge fund manager's current investment strategy. "They're not really sexy names, but when you are in a very emotional market you want mega blue chips that pay dividends."

Baker points out that 22 of the 30 stocks that make up the Dow Jones Industrials currently pay a higher dividend yield than the 10-year Treasury. While Baker concedes that "Prius drivers probably won't like these ideas" he also knows that when times get tough, people look for affordable comfort or what he calls"happiness vices."

And few companies can do that better then McDonald's (MCD). It's a stock Baker thinks can go to $100 a share, that he'd bail out of if it slumped to $82 a share. It also pays a 2.8% dividend. "They're also looking to open store a day in China" with the goal of having 2000 stores there by 2013.

On his previous visit to Breakout in May, Baker said he was done buying Chinese-domiciled stocks and was doing all of his "China plays" via multi-nationals. Therefore he still likes Yum! Brands (YUM) and Wynn Resorts (WYNN) mostly because of their ability to deliver counter-trend performance at a time of weakening economic growth.

Along those lines, he points out that "3 of 4 Chinese men still smoke," which puts Philip Morris International (PM) into his portfolio. Again he has strict buy-sell limits. Baker has an $80 a share price target and a $64 stop-loss level on PM. And let's not forget it has 4% dividend.

Another stock Baker likes is pawn shop operator First Cash Financial (FCFS). What it lacks in dividends it more than makes up for with appreciation since the stock has soared 50% year-to-date, 100% in 12-months, and is currently sitting at an all-time high. Baker likes the fact that it has lots of cash, very little debt, grew its earnings 45% last year, and that "a lot of people are out of work and looking to raise cash."

Speaking of cash, if you're holding on to some and thinking of putting it to work, Baker believes we are on the verge of entering an exceptional time to buy stocks. He explains his "Blue Buy" thesis in our earlier discussion. And as for the actual value of the dollar, Baker believes the greenback will continue to weaken.

Are you recession-proofing your portfolio and are vice stocks a good way to do so? Let us know what you think in the comment section below.