6 Recession Proof Industries: Does your Portfolio Stack Up?

Submitted by Alessandra Miguel-Descalso as part of our contributors program.

6 Recession Proof Industries: Does your Portfolio Stack Up?

It’s a known fact that the stormy marketplace in times of recessions could be quite unforgiving to investors. Many can turn it around by simply knowing how to spot stocks that can hedge against the ill effects of an economic downturn. Do you know what industries to look for?

According to Investopedia.com, there are three industries that tend to flourish during times of recession: Discount retailers, sin industries, and the service industries. Let’s take a look at each of them, plus three more.

Discount retailers are those that offer value-for-money goods that are either sold in bulk or wholesale, and at a lower price points than popular malls or department stores. Costco (NASDAQ:COST), Walmart (NYSE:WMT), Meijer, National Stores, Inc. and Kmart are just some of the most popular discount retailers in the United States.

While they do not necessarily do well in good times (people tend to spend their income on higher-quality goods when the economy is doing well), these stocks perform incredibly well during recessions. “People may not like discount retailers, but in a recession most people end up shopping there,” Andrew Beattie, the writer of the Investopedia.com piece, said.

Jim Cramer, host of CNBC’s Mad Money and head honcho of market intelligence news outlet TheStreet, sees value in such stocks. In 2012, Cramer was invested in Dollar General (NYSE:DG), a Goodlettsville, Tennessee-based company with over 10,000 stores in 40 states. Cramer said in a CNBC report that the company’s expansion in California puts it a great position as the state “represents a sizable chunk of the U.S. economy.”

“One of the chief reasons I like Dollar General is that I’ve never seen the stock of a company eat through not one, not two, not three, but four secondaries, or large tranches of insider stock sales and still come out ahead after every one of them,” Cramer said.

“While the dollar store theme is no longer unknown and the price to earnings multiples of the whole group have expanded rather dramatically, Dollar General still sells at only a slight premium to its growth rate and I expect that growth rate will accelerate thanks to this expansion into California along with ever-improving same-store sales.”

Sin industries, like alcohol and tobacco, tend to increase their revenues during downturns as people seem to increase their consumption. “In bad times, the desire for comforts doesn’t leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash,” Beattie said in the same Investopedia piece.

Beattie adds that brands or businesses that are often sold at gas stations or convenience stores thrive in this dismal economy. On the other hand, gambling, also a sin industry, suffers during recession as people view it as a luxury.

Diageo PLC (NYSE:DEO), the world’s largest spirits producer, was an interesting sin stock from the alcohol segment that saw its value skyrocket during the recession. While trading at just $42 per share in 2008, the stock had sharply climbed to $93.38 in 2012, Money Morning reported.

At the time the US economy was recovering, Diageo reported a 5 percent rise in liquor sales in North America during second half of 2011. During the same period, the company accounts for 28 percent of spirit sales in the United States.

Diageo’s massive growth didn’t just end there: The company endeavored to expand in emerging markets as well. It proved to be a good decision for the company as it saw its volume grow by 14 percent in Latin America, 7 percent in Africa, 5 percent in the Asia-Pacific region. By 2012, the company’s share price was up by more than 22 percent in 12 months.

It is also interesting to note that even small-cap stocks from the alcohol beverage segment were able to manage during the downturn. For instance, small-batch premium spirit maker Eastside Distilling, Inc. (OTCQB: ESDI) which recently went public, trading in the $2 range, was seemingly able, as a private company during the downturn, to grow its business and continue to develop its product line-up.

Meanwhile in the tobacco segment, Philip Morris International (NYSE:PM) generated $8.59 billion in earnings, or $4.85 per share in 2011. Its earnings in 2010 reached $7.26 billion or $3.92 per share. Its revenue then also gained a 14 percent increase to $31.1 billion.

PM is also known for producing lucrative dividends for investors. The company was reported to have boosted its dividend by 20.4 percent in 2011 to $0.77, or an annualized rate of $3.08 per common share.

The service industry also rises in ranks during recessions as people tend to make most of what they have rather than buying new stuff. Companies, specifically, those that cater to the repair and maintenance of goods often observe an increase in customers during the recession.

Then there’s the common stock of world-renowned brands. Although expensive and are more likely attractive to monied investors, these brands are capable of generating attractive dividends for investors and tend to recover their losses easily at times of high volatility. According to a report on MarketOracle.UK, Colgate-Palmolive (NYSE:CL), Disney Co (NYSE:DIS), International Business Machines Corp. (NYSE:IBM), Johnson & Johnson (NYSE:JNJ), Coca-Cola Corporation (NYSE:KO), McDonalds Corporation (NYSE:MCD), Microsoft Corp. (NASDAQ:MSFT), Nike Inc. (NYSE:NKE), and PepsiCo Inc. (NYSE:PEP) are just some of these brands that weathered the recession pretty well.

Colgate, for instance, has seen its dividend rise each year. Data from MarketOracle.co.uk showed that its dividend per share in 2007 at $0.70 has grown by a whopping 174 percent to $1.22 in 2012.

The stock has been deemed recession proof for over two decades. A 1988 report on The Chicago Tribune revealed that Argus Research Corp. analyst Pavlos Alexandrakis admires the stock not only because it’s priced handsomely at$43 a share but because of the “resilience” of its industry, the consumer and household products industry, as a whole. Alexandrakis believed that the stock will not be affected by any downtrend in the stock market in 1989.

“I like the fact that Colgate decided three months ago to sell its health-care division and is going to focus more on packaged goods, which is what it does best,”Alexandrakis was quoted as saying by The Tribune. “It’s now focusing on everything that made Colgate strong in the first place, such as soaps and toothpaste.”

Investors often shy away from these stocks because they are often deemed to be highly volatile, and when they lose they tend to lose big. Charles Carnevale, a columnist of the said website, explains: “I intend to argue that the true risk of investing in common stocks relative to their volatility is how investors react to the volatility, rather than the volatility itself . . . volatility will only hurt you if you panic and sell, especially if you’re selling a strong business.”

“It’s important to understand that volatility is actually a side effect of one of the most salient features of investing in common stocks – liquidity. Therefore, when I see one of my good businesses fall below its intrinsic value, I see this as a temporary illiquid event. I never see it as losing my money, because I believe and understand that my business is worth more than the market is currently pricing it at,” he added.

Last, but not the least, are education stocks. Kiplinger reported in 2009 that people returned to the classroom “to sharpen their skills” during the downturn as the unemployment rate sat at 7.6 percent—a 35-year high.

Apollo Education Group (NASDAQ:APOL), the country’s biggest for-profit education firm and owner of the University of Phoenix, is one stock that has grown tremendously during the recession. Enrollments swelled by 18 pe rcent during Apollo’s first quarter, compared with the previous year. This led to a 22 percent rise in revenue for the company for thesame quarter.

Through February 2009, the stock soared by another 10 percent and at its then share value of $84.23, Kiplinger noted that the stock “trades at a pricey 22 times estimated earnings of $3.80 a share for the fiscal year that ends this August.” This EPS represents some 38 percent increase from 2008 earning figures.

Recessions give people a time to reflect onthe state of their finances, and to divert their spending on things that matter.If the market pulls back, or the capital markets find weakness, it would be wise to diversify and include some recession proof stocks to stay ahead of the market and limit your losses.