It’s no secret that global economic growth is slowing right now, and many investors are worried that a downturn is coming. While it’s important to note that most economists are not forecasting a recession, investors may still want to position themselves for one, or at least increase the weight of defensive stocks in their portfolios. In this context, here are three investment themes and stocks to prepare for a recessionary scenario.
Three investment themes to beat the recession
First, let’s consider a few types of businesses, and the attributes that position them to outperform in a recession.
- During economic slowdowns, consumers tend to delay buying new automobiles, so they need to keep their older vehicles running longer. Auto parts retailers like O’Reilly Automotive (NASDAQ:ORLY), AutoZone (NYSE:AZO) tend to benefit from that.
- Animal health (companion and livestock) spending tends to be relatively immune to the vagaries of the economic cycle. Companies like Zoetis (NYSE:ZTS) should continue to do well in a recession.
- Beverage can manufacturing has secular growth prospects as companies move to shift from less environmentally friendly plastics to metals, and sales volumes tend to hold up well in recessions, while raw material costs can fall too — good news for Ball Corp. (NYSE:BLL).
Now, let’s review some of the details behind these assertions.
Auto-parts retailers do well in a slowdown
You’d be hard-pressed to find many groups of stocks that grew both revenue and earnings through the last recession, but that’s exactly what the auto parts retailers did, as the chart below shows. Trailing 12-month (TTM) revenue and earnings rose in the 2007-2011 period and it’s no coincidence that U.S. light-vehicle sales declined over the period. Simply put, declining sales of new cars mean more miles driven by older cars — which is music to the ears of those whose business it is to keep those vehicles on the road.
AZO REVENUE (TTM) DATA BY YCHARTS
Indeed, a similar pattern has been occurring in recent years, as first a slowdown and then an actual decline in light vehicle sales has been accompanied by sales growth for the auto parts retailers.
AZO REVENUE (TTM) DATA BY YCHARTS
When the next recession occurs, it’s a safe bet that automobile sales will decline further, and auto parts retailers will benefit accordingly. The pick of the bunch is probably O’Reilly Automotive. Its relatively high exposure to the “Do It For Me” (DIFM) market (around 43% of total sales) means it’s less exposed to threats from online competition. Professionals in the DIFM segment usually require their parts immediately, and will buy in-store if they can, as opposed to the Do It Yourself (DIY) crowd, who may have more time flexibility and willingness to wait for an e-tailer’s delivery.
Zoetis offers defensive growth
During the last recession, Zoetis was still the animal healthcare segment of pharmaceutical giant Pfizer (NYSE:PFE). It has since spun off publicly, but to get an idea of how it might do as a stand-alone business in a downturn, let’s focus on how it performed when it was part of Pfizer.
The picture is complicated further by Pfizer’s merger with Wyeth (which added animal health solutions) in 2009, so I’ve used the figures for the legacy Pfizer animal health operations. Its flat growth in 2009 was a fairly commendable performance in a year when U.S. GDP shrank by 2.5%.
DATA SOURCE: PFIZER PRESENTATIONS.
After a near 42% stock price rise so far in 2019, Zoetis now trades at 30 times its estimated 2020 EPS of $3.98 — hardly a superficially cheap stock. There’s little doubt it’s been bid up by the market in part for its recession-resilient qualities. That said, if you are worried about a protracted slowdown in the economy, Zoetis is probably a good place to park some of your money.
An under-the-radar, recession-resistant stock
Ball Corp. is arguably the most interesting investment opportunity in this batch. It currently derives around…
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