5 Sectors That Do Well in a Shrinking Economy

Includes: APOL, FRED, GPS, NGG, PM
by: Stockerati

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 (NASDAQ: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 (NYSE:NGG): People always need utilities, contracting or growing economy notwithstanding. Point made. NGG’s worth a look.

3) Dollar Stores - Fred's (NASDAQ: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 (NYSE: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 (NYSE: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!