5 Recession Resistant Stocks
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Are we headed for another recession? The data suggest it. Although US GDP is still growing, the growth rate is less than 1% and unemployment in the US remains stubbornly above 8%, leading some to argue that the recession never really ended here. Europe just reported a 0.2% contraction, with only Germany showing a gain in GDP. Brazil unveiled a $66 billion stimulus plan last week. The Chinese economy is slowing and inflation fell to 1.8% in July.
So, what should you do? Liquidate all your stocks? No way! During the Great Recession, not every stock went down. The S&P 500 itself actually rose 3.5%. Some stocks did much, much better than that. I will show you 5 stocks that not only beat the S&P 500, they crushed it and I will explain why.
Some Surprising Companies Weren't So Recession-Resistant
People have to eat even during a recession, right? Right. And they will gravitate to lower-cost options, right? Yes, but... Let's look at 3 stocks you'd think would have done well during the last recession: McDonald's, Costco and Wal-Mart.
Of these 3, McDonald's stock did the best losing only 1.0% compared to Wal-Mart's 12.5% drop. Even Costco fell 9.8%. Business-wise, Wal-Mart actually held up the best, but was punished the most of these three. And all three are dividend paying stocks. So, why did they fall?
Because their customers were not recession-resistant. They reduced their purchases and sales at all three companies declined.
5 Recession-Resistant Companies
These five stocks that crushed the S&P 500 don't pay dividends. But either their customers are more recession-resistant or these companies provide services that their customers especially value during an economic slowdown. The 5 companies are Chipotle Mexican Grill (NYSE: CMG), priceline.com (NASDAQ: PCLN), Amazon.com (NASDAQ: AMZN), Rackspace Hosting (NYSE: RAX) and Baidu (NASDAQ: BIDU). The following graph shows how they did vs. the S&P 500 and also compared to McDonald's, Costco and Wal-Mart.
The worst performer of these 5 recession-resistant stocks, Chipotle, was up 66.4%, while the best performer, Baidu, was up nearly 160%. Collectively, these stocks beat the S&P 500 by 19-45 times.
The market rewarded these companies because they all grew their sales and gross margins despite the Great Recession. Sales increased from 15-39% and gross margins from 18-37%. A head-to-head comparison: while McDonald's sales dropped some 8% and their gross margin decreased 4%, Chipotle's sales increased 15% and their gross margin increased nearly 31%.
How Did these Companies Thrive Despite the Great Recession?
Chipotle's typical customers were (and are) more affluent than McDonald's, that is, more recession-resistant. Priceline.com offered its customers a way to reduce the cost of travel. Amazon.com allowed its customers to buy everything for less, from poultry-flavored dog toothpaste to microwave ovens, all shipped free to their homes. Rackspace provided its customers with a reliable alternative to making capital investments in essential, but non-core, equipment to store their data and “fanatical support,” which allowed companies to safely trim their IT staffs. Baidu offered its customers a better way to find everything from information to lower-cost suppliers.
That Was Then, What About Now?
None of the above reasons for the success of these recession-resistant companies have really changed. Wealthier people will always want what they want when they want it. Make things cheaper and people will buy more of it. Economic stress takes a toll and people need to relax. Relaxing is easier when you know you are getting a good deal. Businesses always like to reduce costs, especially during slow times. With the business slowdown in China, I would expect Baidu's advertisers to negotiate lower pricing, cutting into Baidu's margins. They will grow, but probably not like in the last recession.
I like all these companies. Priceline.com is a good buy. As I recently wrote, Chipotle could be in for another 20% tumble, so I'd wait until after their next earnings report. The others are all great businesses and will reward investors.
p366 owns shares of Rackspace Hosting, Baidu, and Priceline.com. The Motley Fool owns shares of Amazon.com, Baidu, Chipotle Mexican Grill, and Priceline.com. Motley Fool newsletter services recommend Amazon.com, Baidu, Chipotle Mexican Grill, Priceline.com, and Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.