The wire has been flooded with talk of a recession. Even worse, among some experts, the question is not whether or not a recession is coming, but how bad it’s going to get. Amid this negative press, we must recognize that recessions are simply a part of our natural economy. During these times, the stock market is often hit hard as people make safer recession-proof investments, such as putting money into CDs or bonds. Just because a recession is here, however, it doesn’t mean that there aren’t good stocks that are primed to do well during these tough times.
Consider these recession-proof investments to make the most of a slow economic time.
Pharmaceuticals
Some argue that more people get sick when the economy is bad. While there are no statistics to prove that theory true, it’s common sense that people will never stop getting sick. During a recession, you can look to established pharmaceutical companies to make recession-proof investments.Most people are familiar with the blockbuster drug names, but they often forget the thousands of other drugs that these companies have in their arsenal. The end result is a large catalog of medicine and drugs that people need to treat an array of conditions that don’t check with the economy before showing up.
Pfizer, Inc. (NYSE: PFE) provides a solid recession-proof investment during slower times. Pfizer has had some knocks recently, but it's still producing a lot of cash flow, and has just raised its dividend for the 41st consecutive year. Pfizer is boasting a yield of 5.6%, which beats just about any CD, bond or high-yield savings account. The stock price may not be moving up anytime soon, but in the short-term, take advantage of the high dividend payout to provide some cash and put a floor on the stock price.
Banking
As much as we dislike banks and their crazy fees, could you imagine not owning a bank account? Despite how poorly bank stocks have performed during this housing market collapse and current talks of a recession, a good bank is not a bad industry in which to make a recession-proof investment. Yes, during slower economic times, things like home loans and construction may slow down, but banks make up for it in other areas. For those who are laid off, starting a business is often an option and that can mean small-business loans. As investors get nervous with stock market returns during slow times, banks will often see flocks of skittish investors dumping money into FDIC-insured vehicles like CDs and savings accounts.Historically, banks are often good dividend payers and this steady dividend income can come in handy during a recession and provide some comfort. During uncertain times, it is often best to stick with larger bank names that have more staying power and are not fully exposed to one particular region or type of banking. Bank of America (NYSE: BAC), for instance, is well diversified with a portfolio of services, including personal checking and savings, insurance, commercial banking, investments, and strategic advisory services -- not to mention the services have global exposure. Additionally, larger banks with broader cash reserves and access to capital are better able to sustain or retain much of their dividend payouts to shareholders when things are tight.
Finally, during a recession, our country’s best weapon is to reduce interest rates. Lower rates typically mean incremental business for banks as people get more comfortable refinancing or taking out loans at lower interest rates.
Entertainment & vices
It’s expected that when money is running dry, people clamp up their wallets. Fortunately for the entertainment and vice industries, the opposite is true. The 1930s, the decade of the Great Depression is also commonly referred to as the Golden Age of Hollywood. Names from movies of this era remain familiar today, like Bob Hope and Shirley Temple.While the real world is causing problems, people are seeking an escape from reality. During a recession, people are more likely to take a big vacation, indulge in some tobacco or liquor, or hit the movie theaters.
From an investment standpoint, you can take advantage of this by making recession-proof investments in companies that cater to this audience. Consider Diageo (NYSE: DEO), which distributes a wide variety of alcohol products like Smirnoff vodka and Johnny Walker whisky. CNBC expects U.S. consumers to continue to buy more alcohol during 2008, particularly higher-end labels.
Additionally, with Diageo’s exposure to China and some pundits thinking that China is in for a big market fall, there may be many disheartened investors in Asia looking to drink some of their problems away. In terms of rewarding investors, Diageo is no slouch, paying out a 4.1% dividend yield.
stocking up
One of the most basic lessons we all learn in economics is that our capitalist machine moves in cycles. Recessions are a natural part of growth and provide some rest and breathing room for the economy to regain its strength for the next run. If you are smart and have a long-term plan, recessions can be one of your best buying opportunities as an investor.Warren Buffet suggests to “look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
Resources:
http://biz.yahoo.com
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