Recession resistant stocks

February 22, 202311 Comments

I’ve argued that there is a decent potential for a recession in the coming year. Here is a bullet point recession pattern from the most recent ValueTrend Update newsletter (click here to subscribe if you don’t already).

RISING RATES CREATE CONSUMER DISTRESS

  1. Consumer distress leads to less spending.
  2. Less spending by consumers means economic/ business contraction.
  3. Economic contraction leads to falling employment.
  4. Lower employment leads to recession.

Here is some current evidence behind the potential recession:

Retail is now starting to shut down locations in the USA (and Canada). In the USA, 800 Big Box Stores are closing locations.
“Bed Bath and Beyond leads the way with its intended goal of shuttering 480 locations. The next biggest hit comes from retailer Tuesday Morning, which is closing down 265 stores. Macy’s, Big Lots, JCPenny and Amazon are shutting down retail locations as well.” – BearTraps

So, lets assume that there is a decent potential for  recession to begin this year. How does one profit in such an environment? One way is to focus on sectors and stocks that consumers can’t and/ or won’t do without. Basic needs, and not so basic needs (booze) suppliers maintain cash flow. Not so much discretionary goods.

Things in life you cant do without, even in a recession.

What we need: Food, water, waste disposal, essential services and products. That kind of thing. There’s things in life we WON’T do without, too. Addictive or semi-addictive products like alcohol, junk food, tobacco. (recall the COVID patterns). Stocks producing these “need/ won’t do without” products and services tend to be fairly recession proof.   Lets look as some “need” and “won’t do without” stock sectors that might be good investments through such an economic potential.

Consumer staples

The consumer staples sector wraps many of the “need” stocks and “wont do without” stocks into one basket. For example, the SPDR XLP ETF holds major positions in the stocks selling or making stuff you need such as basic good producers Mondelez and Proctor & Gamble – along with retailers of such goods Walmart & Costco. It also holds those addictive goodies like Philip Morris, Altria and Constellation Brands. Some people just gotta have a beer and butt. Finally, it holds a good share of sugary goodness makers such as Coca Cola and Hershey. Mmmmmm….chocolate!

Technically, staples are trapped in a box, which has been a good thing during the recent bear market. Ideally, one looks to buy the sector at the bottom of the range, or upon a breakout. Here’s the chart:

 

Garbage and waste

You need to put out the trash, no matter how bad it gets. The VanEck ETF holds the standards in the industry like Waste Connections and Waste Management, along with related firms focusing on water filtration and cleanup. Like the staples sector, you can see the box – another good place to hide during bear markets and recessions.

 

Gambling & gaming

Hey, when you’re broke from losing your job and need money, what better way to better your situation than to gamble at your local casino? Am I right? Well, some people seem to think so. I’d venture a guess that its the same people who view their beer & butts noted above under the staples category as “necessities”. Anyhow, the gaming sector is not without its volatility. But, as the chart below shows, it has its own rhythm. Note how, during the good old days of FAANG and tech exuberance of 2021, the gaming business went down. Suddenly, the bear enters in early 2022, the sector bases. As the bear became entrenched, gaming stocks took off in the second half of 2022. Go figure. Probably a sector to keep an eye on this year, I’ll bet!

Junk food

There are several fast-food stocks out there, although no ETF that I could find focused strictly on the sector. YUM Brands, McDonalds, Starbucks, Dominos, Restaurant Brands Int’l, and Chipotle are all listed. I cant post all of the charts, so I thought I’d go to the king of the happy meal, McDonalds. The chart below illustrates a healthy trend with occasional flat spots (COVID period aside). That healthy stock trend was created by the rather unhealthy trend for many consumers to visit Mickey-Dee’s habitually. This, rather than as an occasional carb and cholesterol-laden treat. A personal friend owns a number of Dominos restaurants, and he relayed similar patterns.  Consumers can feed a family cheaply on a pizza, and many of their clients are very, very regular in ordering pizza’s.

 

Investing in a recession

Demand for discretionary goods tend to fall as rates, inflation and job losses mount. My dad always told me the best strategy is to live conservatively during the good times, and save your money. Then, when a recession inevitably hits, you have the money, and can buy that sports car or luxury item you always dreamed of. And, at a cheaper price!

But some things are just too essential (perceived, or reality)  to give up, even during a recession – noted above. Now is the time to focus on stocks and sectors that are recession resistant. I’ve presented a short list of such stock sectors above. Post a comment below if you have any recession resistant or benefitting stock ideas you’d like to share (SUBSCRIBERS, DO NOT HIT REPLY ON YOUR EMAIL–PLEASE POST ON THE WEBSITE).

11 Comments

  • Keith A question regarding ZMT which you suggested was a recent buy in your update. In October 2021 you made the the same trade based on the gap to CPER and XBM and did quite nicely when it closed the gap. I see now that the the gap to CPER is maintaining at a steady pace but XBM has increased the gap significantly. Does this make this more of an all metals play rather then just a copper play?

    Reply
    • Great question. For sure, copper is the big boy in metals. It tends to set the pace. But metals are in demand as you note, across the spectrum. EV development requires various metals, etc.

      Reply
  • Thanks for this, Keith. I’m wondering if the whole SPX/TSX uptrend is going to fall apart in May after seasonal strength ends. Economic data showing contraction has taken much longer to manifest than I expected, but I still think this has to show up some time this year with all the layoff notices and much higher consumer burden via higher prices and borrowing costs. Do you usually find that stocks bottom well in advance of a recession starting? Could we see another low in stocks in June to September? The strength in the market has been quite surprising to me, but maybe I read too many bears LOL!

    Reply
    • Markets are forward looking. This tends to mean that when recession is finally acknowledged, markets will look forward to falling rates, and move up. Its the period when we don’t hear official recession announced, yet its clear there are signs of recession (like now) that we are in a vulnerable market–and its wise to consider staples etc as part of a portfolio. I just read that there’s something like $175 billion of real estate loans in USA that is distressed – big one in the PIMCO portfolio just defaulted. So, no announcement of a recession yet…but there are signs!
      Remember, recession is the end result – aka falling employment- no sign of that yet. Other steps, leading up to that, as noted in the blog, happen first.

      Reply
  • The dumb money doing their “rain dance” have been taken to the cleaners, in the past 10 days, with the markets tumbling down, as we’ve seen.

    The other “recession proof” investment is related to your article from last week, meaning real estate and rental housing streams. Even in recessions, people need a roof over their heads, more than junk food, booze, cigars or casinos, etc.

    This is where potentially the gold mine is, as you stated…. from the same amount of invested money, you can make 5 times more (example, per month) than dividend income, from major names on the stock market, and tons more than a 3% GIC, municipal or provincial bond, etc.

    With the Roxham Road, or Chemin Roxham, flow of government sponsored and paid refugees, immigration, and overall expanding populations, the construction of new housing is not keeping up. Rents are going up. The gold mine perhaps involving AirBnB yes, but also convering existing single family dwellings into multi-unit rentals, reminiscent of the Japanese hotels, where your room is about the size of a bathtub, multiplying the revenu streams in the same size square feet. This depends on municipal bylaws, of course for this to happen.

    The upshot, is the value of money is dwindling, profitability of major corporations is in question, expansion projects on hold due to the cost of capital, higher, impacting the possibility to meet their required internal rates of return.

    The uncertainty with the Ukraine debacle will slow economic progress on the stock markets.

    Reply
    • Yes, its a strange situation in Canada–we have high rates, and distressed mortgages just starting to appear (see my interview with Bruce Joseph) – yet as you say, illegal refugees flowing in and government providing shelter. So that’s an upward pressure on pricing. Yet, prices are falling. Its going to be interesting ow this plays out.

      Reply
  • Love your Blogs Keith.
    I understand what you are saying about the necessities of life doing better than other stocks come a recession. But, do they not still go down like in March 2020? Is it better to hold cash and buy once the market goes down. In the meantime, I am earning 4.35% in a high interest savings account, with the Big 5, which is fully cashable anytime. It was painful last year at this time when the rate was only 0.20%.

    Reply
    • March 2020 everything was down – it was a panic situation not substantially like most recessions

      Reply
  • S & P 3,970 today …run for the hills …another 50 basis points at the Fed coming…

    Reply
  • What about buying Ung natural gas etf for an oversold bounce candidate. Chart looks similar to the oversold tlt chart earlier. that trade worked well

    Reply
    • We do think its oversold and have a very small (< 2%) position in a nat gas ETF. Like you say--oversold. Not a great long termed story, but hopefully a bounce.

      Reply

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