Stocks that will stay resilient during recession
Many claim that we are quite past due for a recession.
Protecting your portfolio from a possible upcoming bear market is necessary and doable by adding some "defensive" positions.
The ideal "defensive" business should have the following characteristics:
• Products/services that would *still be needed* (or even more needed) while their customers try to cut their budgets: Most healthcare, consumer staples, and utility stocks fit into this category (people still shop, eat, and receive medical care during a recession).
• Value proposition delivering *more benefits* to more customers when the economy slows down: Think about Wal-Mart's "Always Low Prices."
• Revenue and earning growth that would be much *less negatively impacted during recession*. Preferably the revenue growth is positive during 2008/2009 crisis.
• Preferably *strong balance sheet*: Plenty of cash and low net debt are necessary for companies to survive, especially when companies face difficulties in terms of refinancing and a slowdown in sales.
• Sustainably *high margins* and ROIC:These are good indicators of the business moat.
• Prefers dividend payments that would not be interrupted. Prefer companies that have paid *uninterrupted dividends* during the last recession and raised dividend payments consecutively each year for the past few years.
• Medium to *large market cap*. Small-cap stocks tend to drop more than bigger caps during a bear market.
• Healthy *earnings growth*. So if a recession does not occur, these stocks will still do well.
1. *Hermes International* SCA is a designer, manufacturer, and marketer of high fashion luxury goods.
• Hermès has shown a *consistent trend of growing its revenue* throughout the years. From FY2007 till FY2017, it clocked in an explosive growth rate of 12.81% compounded. Even during the Global Financial Crisis of 2008 and 2009, it had shown growth in its revenue.
• This indicates that its customers are not even materially affected during the crisis period and can still afford to continue financing their lifestyles despite a financial crisis.
• Hermès has also managed this phenomenal growth rate with minimal use of leverage. Based on its FY2016 balance sheet, it’s Total Debt-to-Asset Ratio and Total Debt-to-Equity Ratio stands at only 26.9% and 36.8% respectively. EUR 2.3bil out of its massive EUR 6.0bil assets on its balance sheet is in cash and cash equivalents.
• Hermès is a low debt and cash rich company.
2. *Thai Beverage* Public Company Limited comprises four business segments: spirits, beer, non-alcoholic beverages, and food.
• Spirits is the largest revenue contributor accounting for 61.6% of total revenue.
• 2008/09 recession did not affect ThaiBev’s revenue at all. People drink in good times and drink more in sorrow. Spirits and beer contribute the majority of ThaiBev’s revenue and alcohol can be *addictive* as well which pretty much explains why the company’s revenue rose even during the Great Recession.
• Since ThaiBev listed on the Singapore Exchange in 2006, it has been paying a *growing dividend* for the past ten years. Dividend per share increased from 0.22 baht in 2006 to 0.61 baht in 2015.
• The rising dividend per share reflects the strong cash flow generation of ThaiBev.
3. *Amgen*, biotech giant, insulated itself from recession.
• It made vital cancer, anemia and other drugs that consumers couldnt go *without regardless of the macro picture*.
• Product revenue grew 3% in 2008.
• Amgen has hiked its payout regularly since it began making them in 2011. Those hikes have been substantial as well, rising at a 48.2% annual rate over the past five years.
• Stable positioning as a health care stock serving older Americans.
4. *McDonald's* offers affordable food.
• When the economy slows down people still need to eat, and they eat cheaply. McDonald's offers afforable food and great brand power.
• MCD shareholders should also benefit from its great global presence with 37,000 stores in both developed and emerging markets, making it the most widely recognized restaurant brand, serving 70 million customers daily in over 100 countries. This *geographic diversification would lower the downside risk* in case the U.S. fell into a recession.
• During the global financial turmoil, McDonald's considerably improved its margins (its operating margin went from 17% in 2007 to 30.1% in 2009, and gross margin went from 34.7% in 2007 to 38.7% in 2009) and maintained a ROIC (20%) and ROE (32%) that were far above average.
• The stock currently offers a dividend yield of 2.32%, while maintaining its great track record of increasing the dividend each year for decades.
5. *Berkshire Hathaway* has diversified businesses.
• Berkshire has more than 60 subsidiary companies listed on its website. Just to mention some of the household names, this list includes Geico, BNSF Railroad, Clayton Homes, Duracell, Fruit of the Loom, NetJets, Pampered Chef, and Oriental Trading Company. To put it simply, Berkshire Hathaway isn't too dependent on any one business to be successful.
• Some of Berkshire's businesses are likely to suffer in a recession. NetJets, for example, could see its revenue fall in a bad economy. However, other businesses (like Geico, for instance) tend to be pretty recession-resistant.
• While it's possible for the revenue of Berkshire's businesses to fall, the diversification of the business types makes a big, sudden revenue drop unlikely.
• Berkshire has a portfolio of about 45 publicly traded stocks in a variety of industries, worth more than $140 billion as of this writing.
• Just like Berkshire's wholly owned subsidiaries, some of these stocks do well no matter what, some perform well in bad economies, and others thrive when the economy is strong. And, some of the stocks are compliments to each other, meaning that something that hurts one company would help another.
• In short, Berkshire's entire business is *designed to perform well during the tough times*, while still being able to grow and perform during the good times.
Protecting your portfolio from a possible upcoming bear market is necessary and doable by adding some "defensive" positions.
The ideal "defensive" business should have the following characteristics:
• Products/services that would *still be needed* (or even more needed) while their customers try to cut their budgets: Most healthcare, consumer staples, and utility stocks fit into this category (people still shop, eat, and receive medical care during a recession).
• Value proposition delivering *more benefits* to more customers when the economy slows down: Think about Wal-Mart's "Always Low Prices."
• Revenue and earning growth that would be much *less negatively impacted during recession*. Preferably the revenue growth is positive during 2008/2009 crisis.
• Preferably *strong balance sheet*: Plenty of cash and low net debt are necessary for companies to survive, especially when companies face difficulties in terms of refinancing and a slowdown in sales.
• Sustainably *high margins* and ROIC:These are good indicators of the business moat.
• Prefers dividend payments that would not be interrupted. Prefer companies that have paid *uninterrupted dividends* during the last recession and raised dividend payments consecutively each year for the past few years.
• Medium to *large market cap*. Small-cap stocks tend to drop more than bigger caps during a bear market.
• Healthy *earnings growth*. So if a recession does not occur, these stocks will still do well.
1. *Hermes International* SCA is a designer, manufacturer, and marketer of high fashion luxury goods.
• Hermès has shown a *consistent trend of growing its revenue* throughout the years. From FY2007 till FY2017, it clocked in an explosive growth rate of 12.81% compounded. Even during the Global Financial Crisis of 2008 and 2009, it had shown growth in its revenue.
• This indicates that its customers are not even materially affected during the crisis period and can still afford to continue financing their lifestyles despite a financial crisis.
• Hermès has also managed this phenomenal growth rate with minimal use of leverage. Based on its FY2016 balance sheet, it’s Total Debt-to-Asset Ratio and Total Debt-to-Equity Ratio stands at only 26.9% and 36.8% respectively. EUR 2.3bil out of its massive EUR 6.0bil assets on its balance sheet is in cash and cash equivalents.
• Hermès is a low debt and cash rich company.
2. *Thai Beverage* Public Company Limited comprises four business segments: spirits, beer, non-alcoholic beverages, and food.
• Spirits is the largest revenue contributor accounting for 61.6% of total revenue.
• 2008/09 recession did not affect ThaiBev’s revenue at all. People drink in good times and drink more in sorrow. Spirits and beer contribute the majority of ThaiBev’s revenue and alcohol can be *addictive* as well which pretty much explains why the company’s revenue rose even during the Great Recession.
• Since ThaiBev listed on the Singapore Exchange in 2006, it has been paying a *growing dividend* for the past ten years. Dividend per share increased from 0.22 baht in 2006 to 0.61 baht in 2015.
• The rising dividend per share reflects the strong cash flow generation of ThaiBev.
3. *Amgen*, biotech giant, insulated itself from recession.
• It made vital cancer, anemia and other drugs that consumers couldnt go *without regardless of the macro picture*.
• Product revenue grew 3% in 2008.
• Amgen has hiked its payout regularly since it began making them in 2011. Those hikes have been substantial as well, rising at a 48.2% annual rate over the past five years.
• Stable positioning as a health care stock serving older Americans.
4. *McDonald's* offers affordable food.
• When the economy slows down people still need to eat, and they eat cheaply. McDonald's offers afforable food and great brand power.
• MCD shareholders should also benefit from its great global presence with 37,000 stores in both developed and emerging markets, making it the most widely recognized restaurant brand, serving 70 million customers daily in over 100 countries. This *geographic diversification would lower the downside risk* in case the U.S. fell into a recession.
• During the global financial turmoil, McDonald's considerably improved its margins (its operating margin went from 17% in 2007 to 30.1% in 2009, and gross margin went from 34.7% in 2007 to 38.7% in 2009) and maintained a ROIC (20%) and ROE (32%) that were far above average.
• The stock currently offers a dividend yield of 2.32%, while maintaining its great track record of increasing the dividend each year for decades.
5. *Berkshire Hathaway* has diversified businesses.
• Berkshire has more than 60 subsidiary companies listed on its website. Just to mention some of the household names, this list includes Geico, BNSF Railroad, Clayton Homes, Duracell, Fruit of the Loom, NetJets, Pampered Chef, and Oriental Trading Company. To put it simply, Berkshire Hathaway isn't too dependent on any one business to be successful.
• Some of Berkshire's businesses are likely to suffer in a recession. NetJets, for example, could see its revenue fall in a bad economy. However, other businesses (like Geico, for instance) tend to be pretty recession-resistant.
• While it's possible for the revenue of Berkshire's businesses to fall, the diversification of the business types makes a big, sudden revenue drop unlikely.
• Berkshire has a portfolio of about 45 publicly traded stocks in a variety of industries, worth more than $140 billion as of this writing.
• Just like Berkshire's wholly owned subsidiaries, some of these stocks do well no matter what, some perform well in bad economies, and others thrive when the economy is strong. And, some of the stocks are compliments to each other, meaning that something that hurts one company would help another.
• In short, Berkshire's entire business is *designed to perform well during the tough times*, while still being able to grow and perform during the good times.
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