5 Sectors That Do Well in a Shrinking Economy

The debate whether we are witnessing a recession or a stagflation in the US continues (for my opinion, see my earlier postings on this blog). However, one thing that most independent and small investors like you and I can agree on is that it’s indeed a receding economy.

Given this nature of the economy, the question that comes to our minds more often than not are—should I dig in my heels and grind it out or should I convert my stocks into cash or gold ? (I like gold—it’s not my favorite color but it’s a great hedge and adds a nice balance to my portfolio and if you follow my blog, you’ll understand why).

In any case, here are 5 stock sectors (with a representative stock pick– you can also look at other related stocks in that sector to pick one that floats your boat) which typically do well in times such as ours and in times like the past few weeks. Ready? Here goes:

1) Education providers  - Apollo Group (APOL): When there’s panic in the marketplace and job security’s a concern or job losses are on the increase, guess what do people do? They go to school to get better qualified for the competitive market place. Sometimes, they go to school upon losing their existing jobs to qualify for the next better one. APOL runs University of Phoenix, ITT, etc. which are institutes that specialize in educational diplomas and associate degrees. APOL’s rallying nowadays. Always a safe investment in contracting economies.

2) Utility providers  - National Grid (NGG): People always need utilities, contracting or growing economy notwithstanding. Point made. NGG’s worth a look.

3) Dollar Stores - Fred's (FRED): In contracting economies, people go cheap. They conserve their cash by going to dollar and discount stores for their needs. FRED runs one of the larger discount and dollar store chains in the nation and they are on the rise as well.

4) Tobacco - Phillip Morris (PM): Smokers will be smokers and boom or recession, they need to light up. There’s always a reason to celebrate or to mourn and what better company than a cigarette? This sector does well and is a sought after investment during contractions.

5) Basic clothing companies  - Gap (GPS): People don’t wear Armanis or Diors when the economy’s in a downturn or there’s a risk to jobs. They wear something decent and affordable. This is where Gap comes into play. Gap incidentally did pretty well during the last recession. They are up now as well.

(click to enlarge)

The graph above shows how the stocks (representing their respective sectors) have done in the past 30 days. Initially, I thought of making this article a follow-up to  my “Signs we are in a recession” post. However, given the dying-optimist that I am, I see the glass as half-full :)

Yes, these stocks above point to a current and imminent contraction/recession but at the same time, they also make for interesting and potentially rewarding opportunities in this fickle market.

In the spirit of disclosure, I currently don’t own any of the above stocks but will keep you posted on what I decide.

Hope you find this useful.

Stay positive- we’ll all weather this out!

Comments

[Retriever5280]

Liquor stocks do well during a downturn as well.

[doylegroup]

Cheers!!

[stockerati]

Yes, they do. So do healthcare and pharmaceuticals. The article above shares my favorite 6

[stockerati]

Make that my favorite 5

[bearfund]

I'm staying away from health and pharma. Yes, they're traditional recession plays, but this recession is a little different: it's a presidential election year and socialist medical programmes are a hot issue. While there are companies that could do well even under such a scheme, it's always difficult to predict what politicians will do. Political risk is probably the risk class I most seek to avoid. If you feel differently, load up.

[firstpostguy]

Though I cannot disagree with your overall assessment, I would remind readers to perform due diligence on APOL. A brief quote from a recent Motley Fool article points out that operating profit is 16.5%, down from 23.6% from a year ago.

From the CFO Joe D’Amico "the overall cost to acquire a student has increased versus a year ago."

Also from the article: "Apollo's marketing costs ran up 25% in comparison to last year's Q3 -- nearly twice as fast as overall revenue..."

No expert by any means, just expressing another viewpoint.

Disclosure: currently short APOL

[cranmer]

PM is rockin'

[stockerati]

I love readers like Peter. He's one of a kind and his comments make my day :) Keep it coming. If you ever wrote an article, Peter, I promise to take inspiration from it. But hey, do you write anything but comments?

[fatcat]

Stockerati,I don't care what you are..I just want ideas,then I can do my own research,then make a decision..

[Peter W]

I don't write articles. I perform real analysis with real numbers for a fund. If you ever write anything that is more than simpleton assertions I will be shocked.

For example, this is how real analysts do their homework. You could have gone back to past recessions and demonstrated using real numbers how those sectors you've highlighted have historically outperformed the market. Furthermore, you could've done some simple relative value analysis (PE, EV/EBTIDA, Cash Flow multiples, I'm sure I've already lost you) and shown the particular equities you've highlighted are undervalued.

But that would have required real analysis, something I'm sure you are in capable of. Go on making assertions without any backing and posting childish responses, I'm sure you're going to have a long career as a blogger.

[stockerati]

Well, when you have written a real article and not just rattled off "how to analyze stuff" from one of the million websites, let me know. Then we'll talk. I expect all readers to do their own research and make their own decisions and NO, I dont want to make a career as a blogger, Peter. Unlike you, I've a real day job :)

[David Tsao]

Do you guys mean to do deep analysis like this?

seekingalpha.com/artic...

Sorry, I couldn't help but plug myself.

[stockerati]

And like this stockerati.com/analysi... or this stockerati.com/bucy

[Joe Public]

While I think PM could be a good investment, they don't sell their products in the US. The company that spun them off, Altria, does. So to say PM is a good buy because the US economy is tanking, isn't good logic.

[stockerati]

The tobacco sector has traditionally been a safe investment during recessions. Given the tight correlation between global economies, US is an integral part of the current global recession and market decline.

My recommendation was tobacco is a good sector to invest in and I like PM. However, Joe's got a fair point and I understand why it was interpreted this way. I should've clarified the point better,

This is fantastic feedback and is very useful for me. Thanks much.

[LilOldLadyinMississippi]

Most institutional investors I follow agree with Stockarati. Of course, they are the ones manipulating individual investors and making all the money.

[stockerati]

:) I don't know how to react to this. Just so you know, this is who I am and why I write stockerati.com/hello-w...

[woody]

If cheap oil made this country rich, expensive oil will make it poor. I like tobacco, energy, communications and food stuffs.