Hedge the Recession with Staples and Sin Stocks

This week’s whipsaw markets symbolize the significant economic insecurity we face in 2008. As the selling activity heightens, investors are rushing to stay on the sidelines with cash. However, amidst the rollercoaster stock market, there are certain industries that can provide a safe hedge in the tumultuous market.

• Consumer Necessities: In any market, non-cyclical stocks balance your portfolio, and they are an especially excellent defense against economic hardships. Most important in this category are food, personal care, and household goods – the bare necessities for human existence. Regardless of the economic conditions, consumers must purchase these goods and services. Johnson & Johnson (JNJ) and Proctor and Gamble (PG) are two consumer companies that consistently raise their dividends, posting gains every year for the last decade – but you may want the price to pull back slightly amidst additional market declines to capture a good entry price.

In addition, non-cyclical stocks constitute a good defense against economic recessions because they are also a long-term hedge against inflation. The large-cap stocks in consumer necessities also pay consistent dividends, which are a great source of income during recessionary times.

• The Vices: Sadly, the more turbulent the economic times, the more people indulge in their vices – especially when it comes to gambling, tobacco, and alcohol. Two attractive stocks, whose falling prices last week make low entry points, are Altria Group (MO) and Anheuser-Busch (BUD). For example Altria, one of the world’s largest tobacco makers, has averaged 14.5% annual return over the last 10 years – meaning it has sustained consistent growth despite the busts and booms of the market. Buying sin stocks for your portfolio can give you a hedge against recessionary conditions.
• Health Care Sectors: Regardless of how poor the economy performs, people will still fall ill. Considering that the health sectors have underperformed in the last several years, investors can capitalize upon the low stock price – especially as a hedge against the flailing consumer and financial sectors. The health sectors stocks represented in the S&P 500 essentially match the overall index’s P/E ratio, giving them stability throughout economic times.
• Insurance Stocks: Like the basic necessities of life, people will always need insurance. Life and property insurance remain in demand, even in the worst economic conditions. Not only do insurance stocks weather slowing business, but they also provide large, consistent payouts matched with pricing stability.
• Energy Developments: With oil prices expected to remain above $85, energy stocks surrounding crude oil will continue to perform well into 2008. Another emerging area within the energy sector is renewable energy. With higher energy prices, these stocks are coming into the limelight. However, as it currently stands, developments have not yet been made that allow renewable energy to be cost-effective. As Google’s new venture, RE < C moves forward in its development, keep an eye on growth in this recession-proof sector.
• Go Global: With international economic globalization, countries are no longer dependent upon the performance of the United States; the rise of the euro is case in point. Taking your dollars abroad for investment provide a great hedge against domestic troubles. However, keep in mind that countries whose economies are disproportionately dependent upon exports will feel the pressure, while economically diversified countries – such as Japan and Europe – can maintain their independent growth.

Comments

[pennystocks2008]

Three objections:

1. Tobacco: You can't assume that the tobacco companies will continue to grow their earnings like they did in the past. Regulatory issues used to play a minor role then. That has changed dramatically, with banning of public smoking in a lot of Western countries. Growth is only possible in emerging countries with much less affluent customers.

Insurance: Oh yes, AIG (should you opt for the largest insurance company) makes a great hedge against recession these days (down 40 % since last summer and still falling).

Go global: Invest in European stocks and this will only get you so far. For you are investing in a very strong euro. But what happens if the euro weakens against the dollar (which it eventually will)? Then the stock price has to increase more quickly than the value of the euro deteriorates. Doesn't sound like a safe hedge for a portfolio to me.