The sour memory of the last recession is still very much in our mind. Indicators over the last couple of months point toward a situation that can turn potentially grave once again. Adding fuel to the fire are the multifarious predictions of the Wall Street prophets, a few of whom see an approaching gloom on the investment horizon.
The market is heading toward an imminent “bloodbath” believes the billionaire investor Carl Icahn, who has put the primary blame on the Fed’s no-rate-hike decision. This Wall Street veteran disclosed that he is more hedged now than ever before.
On the contrary, Jim Cramer is not yet ready to play such a defensive strategy. And according to Doug Kass of Seabreeze Partners Management, “Icahn’s concerns are well known, and not as dire as the market feared...”
In the craziness that is building up before the 2016 presidential elections, several political hopefuls are throwing prickly commitments over social media and the market is responding with utter sensitiveness to these hypothetical vows. Not least, the contrasting views of the influential investors are motivated by their political sentiments. The fallout is a state of panic being created among investors.
Why Hedging Could Be Risky
Without a doubt, there are some unrealistic ingredients stirred up in the apparently bull market indicating a big sell-off round the corner. However, hedging is perhaps not a good ideas when there is a chance of recovery as well. In fact, any diversion from the expected collapse may call for huge losses to your portfolio if you opt for down-side betting strategies like buying put options or inverse ETFs.
What’s the Safest Investment Strategy?
We suggest not to abandon the stock market altogether. Instead, you should identify the sectors/industries which have empirically demonstrated resilience during the last recession seven years back and have subsequently recovered pretty fast. And accordingly pick stocks from these sturdy, if sometimes prosaic, corners of the equity world. Evidence shows that the ideal implementation of this strategy can create a no-negative situation for investors.
Where Are the Recession-Proof Stocks?
When the economy is in recession and income falls, the first survival strategy is to switch to cheaper alternatives. We are most likely to forego the expensive dine-out at that chic restaurant or turn our back to the branded dress in the shop window. Instead, it’s fun to take the family out for pizza and buy non–branded retail apparel with focus on value.
If you think about it, this actually indicates a rise in demand for pizza or increased footfall at the retail shop during the recessionary phase. In fact, by the end of the last recession, with new campaign and product recipes catering to customer demand, profits more than doubled for Domino's Pizza, Inc. (DPZ - Free Report) . If frugality is the keyword here, we ask you to keep an eye on stocks like Papa John's International Inc. (PZZA - Free Report) , The Kroger Co. (KR - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) . General Mills that mainly offers breakfast cereal at reasonable prices can also be on investors’ checklist.
Other retail stocks like Dollar Tree Stores and Ross Stores are a perfect fit for the income earners who are striving to save every extra buck of their hard-earned money. Besides, home appliances, be it for cooking or for other household activities, might remain unhurt during the time of recession. Hence, stocks like National Presto Industries Inc. that has bestselling products like Presto cookers, pizza oven, hot-air popcorn popper and many other easy snack makers are expected to do well.
So what if it’s a recession, there will always be time for leisure. While the corn pops, we can put up our feet and let down the hair and settle down on the couch for our favorite romantic sitcoms. The exotic vacation that we had dreamed of can wait for now. Top media and entertainment stocks as well as television and video games companies know exactly what we’re looking for and in turn might see their profits rise on some binge-watching.
Essential commodities, more specifically utility products like water, gas and electric as well as cheaper household product brands are a blessing for the Everyman. These companies by helping us save money also do well during a recession. Hence comes the name of Church & Dwight Co., a perfect example of a growing stock during the recession with its set of cleaning products and personal care items under the Arm & Hammer brand. Several staple food brands may also do well.
Longevity is another keyword for investors looking for stocks that can beat the downtime. While luxury branded car companies will probably go bankrupt, people will still need strong and sturdy but cheaper cars with improved features. Accordingly, Hyundai Motor Company and Ford with their many such options might prove to be the practical choices during a recessionary phase.
3 Stocks Likely to Thrive If Recession Comes Knocking
While the S&P 500 index plunged more than 42% during the six months of peak recession (Sep 2008 to Feb 2009), with many stocks crashing down to much less than their IPO prices, a handful of stocks had demonstrated strong resistance. The following three stocks with solid fundamentals and a stable industry foothold, not least a legacy of recession-resistant performances, look to be promising picks amid the current uncertainties.
Dollar Tree, Inc. (DLTR - Free Report)
Dollar Tree is one of the leading single-price-point retailers in North America. The stock price had remained stable during the six-month recessionary period in 2008–2009 indicating a massive shift in consumer preference to cheaper products. We are also looking forward to the company’s recently completed acquisition of Family Dollar Stores where customers can find many items at $1 or less, while most are priced below $10. In fact, Family Dollar was one of the very few stocks which witnessed an uptrend during the great recession. The stock had rallied 11% in this period which alone speaks for itself.
Keurig Green Mountain, Inc.
Products of this technology and value-based personal beverage system company can be an ideal choice for households/offices on a tight budget even when it comes to a cup of coffee. The stock showed solid resistance during the recessionary phase when it slumped a mere 2% only and soon recovered its losses. Currently, with an expanding family of 80 specific brands and 575 varieties of products, this stock is expected to be in good shape over the upcoming months.
Treehouse Foods, Inc. (THS - Free Report)
This is a leading supplier of private label food and beverage offerings to retail groceries. Packaged or semi-processed products can remain ahead of other renowned brands in terms of price competition − an ideal choice for a slump. When other stocks were crushed by the wheel, Treehouse Foods put up a staunch battle, suffering a nominal fall of 4% during the recession.
Recession is an inevitable part of a business cycle and playing 100% defensive won’t help much. In fact, lessons learned from past success stories of the aforesaid stocks, the ability to think out of the box and evolve the portfolio accordingly might be a better defensive hedge than financial hedges themselves. Of course, do pay heed to our renowned Wall Street veterans but always follow your judgment.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>