Strategies for how to deal with a correction, or even a potential crash, range from establishing short positions to defensive dividend mega-caps, bottom picking individual sectors or just going to cash and waiting. Each of these strategies has serious disadvantages. Shorts can get squeezed if the trend continues. Defensive positions will preserve capital, but will not net you any gains if the worst does occur. Bottom picking is dangerous if timed incorrectly. Going to cash exposes you to inflation and definitely will not get you any gains.
But there are recession stocks out there that are either tied to industries that tend to see increased business during a downturn or are tied to commodities with relatively inelastic demand curves. Here are four of them.
Dollar Tree
A recession hits, your portfolio is down and you can no longer shop at Whole Foods for gourmet tuna and Abercrombie & Fitch for your designer clothing. To your chagrin, you head over to Dollar Tree to see how much stuff you can buy for $20, and it turns out to be a lot. Dollar Tree Inc. (NASDAQ: DLTR) shares barely reacted to the 2008 financial crisis, and it is likely they will not be too battered if something like that happens again.
In fact, Dollar Tree’s top and bottom lines were pretty much untouched by the chaos. (See page 17.) Dollar Tree has the advantages of being a defensive stock without it being a typical mega-cap unable to see much growth.
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Dollar General
Same concept here. Dollar General Corp. (NYSE: DG) is larger than Dollar Tree, and it does have a small dividend. Both 2008 and 2009 were spectacular years for Dollar General. (See page 27.) The company is near its highs along with the rest of the market, but will not fall nearly as hard if the market reverses, and may even continue higher on the increased business that usually comes with financial stress.
California Water Service Group
Water has the double benefit of being a price-controlled monopolized commodity and being necessary at all times. Not that monopolizing water supplies under government control is necessarily a good thing for consumers, but it is for the companies in control.
With California Water Service Group (NYSE: CWT) in particular, we have a decent dividend yield of 3.2%, a choppy but nowhere near crash-like performance during the last financial crisis, and the possible catalyst of a much-needed wet California winter thanks to a predicted intense El Niño effect this coming year. The ongoing extraordinary drought in California has put pressure on earnings, a spring that should be released if and when drought conditions are finally eased. The weather does not react at all to market corrections. That’s for sure.
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H&R Block
Taxes probably will never get simplified until the whole system collapses under its own weight, rather than from any political decision to do so. Since taxes are not a market phenomenon but a political one, H&R Block Inc.’s (NYSE: HRB) fundamental business has nothing to do with the economy, and the dividend is OK. In fact, a financial crunch probably will complicate the tax code even more as politicians try to solve problems in that amazing way they always do.
The only reason H&R Block performed poorly in 2008 was that it overinvested in mortgage-backed securities and got sued for it. Oops. It is still suffering from a hangover in that department, but is nowhere near as exposed as it once was, so a downturn should not hurt it nearly as much as it did back then. Tax service revenue was actually up that year, incredibly 30% higher than it was even last year. H&R Block is only much higher now because it has streamlined its own operations and brought expenses sharply down in a very impressive reorganization.
The one near-term danger to H&R Block is Donald Trump, who has publicly stated specifically he wants to put H&R Block out of business. Well, if he is elected, you can always sell it or go short.
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