Recession Investing Part 4: Recession-Proof Sectors

Welcome back to our Smart Money Club series on recession investing. In our previous lessons, we learned how to and how not to invest when a recession is coming or is just starting. When a recession occurs, the markets will become increasingly volatile, which causes investors to sell stocks off. Some industries are very susceptible to the economic cycle, but some sectors continue to perform well. To take your trading to the Power of X, we will cover some recession-proof industries that are good targets for investing no matter what is happening with the economy. 

Nothing is 100% Recession Proof

While there are no recession-proof companies, there are some sectors that will tend to not just to outperform that markets on the whole but perform well even while unemployment increases and economic sentiment falls. It is, therefore, an excellent strategy to add companies from the following industries before or just as a recession is coming. 

Funeral Services and the Death Industry

Yes, the old saying, only death, and taxes are certain, is apt here, and we can not invest in the IRS, so the industry of death is our other choice. The U.S. only has three public funeral service companies, Service Corporation International, Carriage Services Inc., and Stonemor Partners L.P. The largest is Service Corp which has about 15% of the total market’s revenue but only 10% of the homes. Additionally, Matthews International Corp. is a leader in casket making. These companies’ services are focused on an area that tends to be recession-resistant.  

Consumer Staples

There are certain products that are always needed for daily life, and we saw how toilet paper could be hoarded during the Covid pandemic. Hygiene supplies like toothpaste, shampoo, and soap, as well as cleaning supplies, paper towels, laundry, and dishwasher detergents, are all under the umbrella of consumer staples. The three biggest players in the sector and Colgate-Palmolive, Unilever, and Proctor & Gamble. They are global firms with products in nearly every home. Being global, they are even less impacted by smaller and more localized recessions.  

Discount Retailers and Grocery

Most of us do our shopping for food and consumer staples in a big box discount retailer or grocery store. Walmart, Target, and Costco are the largest discounters, and Kroger is the largest grocery store company. Likewise, Dollar General is the most significant player in the smaller discount store segment of retail. 

No matter how the economy is fairing, these giants produce hundreds of billions in revenue combined.  

Legal Vices (Alcohol and Tobacco)

Beer, wine, liquor, and cigarettes are high-margin and even addictive products that remain in demand. Only a few companies have monopolized many of the largest beer and liquor brands globally. The three largest alcohol producers are Anheuser Busch (owners of Budweiser, Corona, Becks, and Stella Artois, among others), Heineken (owners of its namesake, Tiger, Amstel, and Sol), and Diageo (owner of Johnnie Walker, Smirnoff, Tanqueray, and Guinness, among others). The three largest Tobacco sellers are British American Tobacco, Philip Morris, and CNTC (China Tobacco). The third of these is the world’s largest but is only listed on the Hong Kong Exchange, making investment a little trickier.  

Drinking/smoking habits do change over time, and during a recession, consumers often substitute for cheaper brands, so be aware of this and economic trends when investing.  

Cosmetics and Beauty

Cosmetics/Beauty are similar to consumer staples but are considered their own category. Procter & Gamble and Unilever are also big beauty industry players. The “lipstick effect” is seen when buyers continue purchasing beauty products in an economic downturn, trading other luxuries like travel and jewelry for these small pleasures. The three biggest players purely in cosmetics are Estee Lauder, L’Oreal, and Coty (the largest licensed brand manufacturer).  

Seven consumer staples and beauty companies have nearly all the brands you know of:

Beauty Brands Web graphic UPDATED

Their resulting noncyclical product portfolios end up doing well in all economic conditions. When times are good, the luxury brands will do well; but lower-priced products are still purchased during downturns. 

Summary

As with all investing, having a well-rounded portfolio reduces your risk. Though no company can guarantee that a profit will be generated and investment returns are sure to be seen, some industries generally perform well in a recession. Taking your trading to the Power of X, the above sectors and companies can lower the risk profile for your portfolio. We consistently need these products and services, no matter the ongoing economy. Some cheaper substitutions can be made, but many of the brands are “sticky,” with consumers willing to forego other items to continue purchasing these, and/or the company has a wide selection that will accommodate any substitutions so that they will continue to pick up buyers’ dollars.  

Did you miss Part 3 of this series? If so, click here to get caught up.

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