Are there companies that thrive in recessions?

The central theses

  • When consumers spend less, profits slow, forcing companies to cut costs and take a more defensive stance.
  • For some industries, consumers will continue to spend, meaning businesses will not be hurt by the recession.
  • Investors need to look at the industries that provide the goods and services people need to find good stocks to invest in, no matter the state of the economy.

When you hear about an imminent recession, you immediately conjure up images of people and businesses struggling as the economy slows. These images might even appear to you in black and white.

While this is the case, not every business is affected to the same extent. Some businesses even thrive during a recession. Here’s a look at why some businesses suffer during a recession and other industries thrive.

What is a recession?

A recession is a period of economic decline, usually denoted when gross domestic product (GDP) records two consecutive quarters of negative growth. Some experts believe that for a real recession to happen, the unemployment rate must rise sharply in addition to negative GDP numbers. Recessions are often preceded by an inflationary environment, which further slows consumer spending.

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the official body that announces a recession. She defines a recession as “a significant decline in economic activity that is spread across the economy and lasts longer than a few months.” The committee has no hard and fast rules for declaring a recession, but it gives the greatest weight to personal income.

Why Most Businesses Suffer During a Recession

The US economy is based on capitalism, which has simple inputs and outputs. A business opens to offer a good or service, and consumers pay for their purchases with their income, budgeted or at their discretion. The company makes a profit on each sale while the consumer gets something that satisfies their needs or desires. As the company grows, it hires and pays employees, who then spend their earnings. Those employees are also consumers, and consumer spending drives the US economy.

Businesses can expect stable sales and profits in a normal economy, where inflation is minimal and people have reliable incomes. Inflation disrupts this balance by raising prices and reducing the purchasing power of the average consumer.

For example, a consumer spends $75 per week on groceries, with an average cost of $3 per item. The consumer comes home with 25 items. Inflation increases the average price of an item to $5, resulting in the consumer taking home 15 items. That’s 10 items remaining on the shelf – items that would have sold in a normal economy. In short, a recession disrupts the reliability of a company’s earnings.

The retailer must choose to keep their prices at current levels to maintain profitability or put the items up for sale and make less profit to move their inventory to avoid a total loss on those items.

Different types of businesses that thrive during a recession

People need certain types of services to support their daily lives. Life gets harder without them, and certain aspects of society would literally collapse without them. The following is a look at some of the services that haven’t been significantly affected by a recessionary environment.

childcare

Day care centers will always be in demand as long as parents need someone to look after their children while they work. This applies to both one- and two-income households.

The only investment option for a childcare-only stock is Bright Horizons Family Solutions. They operate child care and early education centers in the US, Canada and Europe. Because it’s the industry’s only publicly traded stock, it’s difficult to rate it against its peers. However, finances are strong and the company plans to expand in the coming years.

repair services

The repair services category includes everything from automobiles to major household appliances. When something breaks, it needs to be fixed. People repair items to save money and extend the life of their possessions.

Repair services are therefore always in demand, along with qualified technicians. In fact, demand for repair services increases during a recession as consumers choose to repair rather than replace when money is tight.

Most repair services are small, local businesses. Very few are large, publicly traded companies. But that doesn’t mean there aren’t stocks to invest in, you just have to think outside the box a little.

For example, you could invest in Home Depot or Lowes to take advantage of people repairing and upgrading their homes. Many consumers are taking the DIY route rather than buying a new home during a recession.

You might also consider Advanced Auto Parts since people are repairing their vehicles instead of buying new ones.

funeral directors

Death is an unfortunate fact of life, and funeral homes are a necessary supplier. Funeral costs have increased as environmental laws make burial more expensive. As a result, more people are being cremated.

While many funeral homes are private companies, some operators are publicly traded. One of the best is Services Corporation International. They provide death care services including cremation, funerals and cemeteries. While the S&P 500 is down about 20% for the year, this stock has remained flat.

Some other stocks in this industry are AlderwoodsGroup, Carriage Services and Stewart Enterprises.

garbage collection

Garbage trucks take out garbage every day, people and businesses will make sacrifices in other areas of their lives before leaving without removing their garbage. This industry is recession-proof.

Waste Management and Republic Services are two freight forwarders that handle disposal for residential, commercial and municipal customers, helping the company spread its risk compared to those who only serve residential customers.

Republic Services operates nationwide and is the second largest garbage collector in the United States. The company has solid earnings history and a positive outlook on future earnings.

cigarettes and alcohol

While people will cut back on discretionary spending during a recession, they typically won’t cut back on vices like cigarettes and alcohol. With cigarettes, buyers are addicted to nicotine, they will cut spending in other areas first.

The same applies to alcohol. Consumption may drop a bit, but not significantly, let alone dry out.

Altria is a cigarette company that’s had its ups and downs of late, but it’s still a solid stock that pays a strong dividend. Altria’s biggest challenge is government regulation of cigarettes and e-cigarettes, which has negatively impacted Altria with its proposed acquisition of Juul Labs.

If you’re looking for an alcohol stock, Constellation Brands produces beer, wine, and liquor. Some of its brands are Corona, Wild Horse Winery and Svedka Vodka. The company has strong finances and will benefit in a strong or weak economy.

bottom line

If you’re an investor looking to make money, or at least cut your losses, during a recession, look at the industries people can’t live without, no matter how the economy is doing.

If you need help deciding where to invest, you can save time by using an investment kit from Q.ai. These themed kits are designed to take the guesswork out of investing. Some themes are Inflation Protection, Value Vault and Guilty Pleasures. You can even opt for portfolio protection to further limit downside risk.

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