Recession-proof businesses are traditionally defined as industries that thrive during rotten economic trends, or at least emerge pretty much unscathed.
The global financial crisis of 2007–2009 practically rewrote the rules about recessions.
Many economists are now saying that there is no longer such thing as recession-proof industries.
The best investors can hope for are recession-resistant businesses, meaning ones with a better chance than most of riding out the storm.
The key is finding a company or industry that shows long-term growth potential, is immune to outsourcing, and isn’t tied to the fickle tastes of consumers.
Some of the most economically resilient companies are usually the more unusual or least obvious in nature.
Contraceptives and Online Dating Services
In bad times, the bad do well.
I’m referring to what are commonly known as the “sin industries.”
More specifically, sex.
People tend to patronize the sin industries more so during a recession. The desire for comfort doesn’t subside when money gets tight — it just scales down.
The bedroom makes an excellent escape during turbulent economic times. But to avoid any unplanned expenses delivered in about nine months, contraceptive sales skyrocketed 10% during the first two months of the Great Recession.
A study by Pew Research shows women are less likely to have children when the economy is bad.
States that economically tanked in 2007 and 2008 also had the lowest birth rates in 2008 and 2009.
Unsurprisingly, that also triggered a significant increase in the use of birth control, and the companies that market all forms of contraception benefited greatly.
Birth control makes up only a small portion of the businesses in the pharmaceutical industry. However, more than half of birth control stocks pay dividends.
One example is Pfizer Incorporated (NYSE: PFE), which makes Depo-Provera, the contraception injection that is administered every three months.
It also yields birth control pills such as Lybrel and Loestrin. The stock carries an outstanding 4.3% yield and trades at 8.4 times forward earnings.
Pfizer has a 167-year long history, which signifies that it remains there for its investors through the good and bad times.
It has survived and thrived throughout some of the most difficult times in history, making it a perfect stock to buy and never sell.
There are many others similar to Pfizer in this regard.
Another interpersonal and sex-driven area that performs surprising well during a recession is online dating.
Recession or no, people are always searching for companionship either for dating or for marriage.
To date, this industry has already hit over $650 million in sales.
And the best part is, there is no need to ever leave your home.
The most popular companies in this sector are those that offer online dating to their clients via an app or website.
Discount Retailers and Dollar Stores
Low prices always trump politics and diversified views on discount retailers and dollar stores during a recession.
Jittery middle-class shoppers, some still worried about the onset of another recession, are flocking to the small-format bargain stores and discount retailers, which have survived and flourished since the Great Repression.
All of this is owed to shoppers switching to a more frugal mindset.
While every other large retailer suffered losses in 2009, Wal-Mart (NYSE: WMT) reported a 5.1% increase in profits, more than doubling Wall Street’s predictions of 2.4%.
It often suffers in good times, as people flush with cash tend to buy higher-quality goods at competing outlets. But when times are bad, retailers like Wal-Mart excel at providing cheap goods to customers.
Dollar stores and thrift stores became Wall Street darlings during the recession, as Dollar General (NYSE: DG), Family Dollar, and Dollar Tree (NASDAQ: DLTR) added thousands of stores from 2008 through 2012.
Thrift shops and resale stores also drew in lots of new customers during the recession.
According to America’s Research Group, 20% of people in 2012 said they have shopped at thrift stores, up from 14% in 2008.
The dollar store sector will likely continue to benefit from low price points and locations that are convenient for cash-tight shoppers, says Moody’s Investors Services.
Dollar Tree pretty much has the market to itself now, with the failed exit of Wal-Mart Express, Wal-Mart’s attempt to enter the smaller-scale dollar store sector that crashed due to issues ranging from product mix and pricing to supply chain logistics.
It’s expanding rapidly. In 2015, Dollar Tree completed the takeover of Family Dollar for $9 billion — a company that even Wal-Mart and Dollar General had their sights on.
Dollar Tree has now trumped Dollar General, becoming the largest discount retailer in the U.S.
The all-encompassing “bargain store” niche is ideal for long-term wealth building because of its ability to withstand economic downturns.
Candy
Fun fact: Did you know that tons of your favorite candies, like Snickers, Tootsie Pops, Candy Buttons, Peanut Chews, Heath Bars (my personal favorite), Hershey’s Assorted Mini’s, Kit-Kats, Lifesavers, Mallo Cups, Crunch Bars, Milky-Ways, and Three Musketeers, were all invented during the Great Depression?
Tough times have a way of encouraging America’s sweet tooth.
Candy consumption went through the roof during the Great Recession just a few years ago.
Studies show that candy can soothe anxiety, especially during economically troubling times.
The New York Times reported that Cadbury’s profits increased over 30% in 2008. Nestle’s (VTX: NESN) profits saw a 10.9% increase during that time also. Hershey (NYSE: HSY) struggled for much of 2008 but finally saw profits jump by 8.5% in the fourth quarter.
These inexpensive sweet treats, just like other items that can be bought at gas stations and convenience stores, always perform well during a recession.
Lindt & Sprüngli (SWX: LISN), which specializes in more expensive products like Lindt and Ghirardelli chocolates, announced that even though it had to close some of its luxury retail stores in 2009, it expected chocolate sales to remain strong through mainstream retailers like Wal-Mart.
The Times also reported on candy sales during the middle of the Great Recession, interviewing candy shop owners for their input on the matter:
At Candyality, a store in the Lakeview neighborhood of Chicago, business has jumped by nearly 80 percent compared with this time last year [2008], and the owner, Terese McDonals, said she was struggling to keep up with the demand for Bit-O-Honeys, Swedish Fish, and Sour Balls…
At the Candy Store in San Francisco, the owner, Diane Campbell, has tripled her orders for nostalgic candies like Necco Wafers and Mallo Cups in recent months. Many of her customers tell her that even though they are living on less, they’re setting aside cash for candy. “They can put candy in their actual budget.” she says.
Candies offer an inexpensive break of self-indulgence and respite without having to break the newly tightened budget.
Funeral Services
This has to be one of the most overlooked, non-cyclical, recession-proof industries out there, as morbid as that may sound.
It deals with an inevitability that will never run out of customers despite the current status of the economy’s health.
This industry’s inelastic nature makes it ideal for recession survival.
The morbid nature of the business does not mean individuals can’t profit from investments here.
The funeral industry as a whole can be broken down into cemetery owners and operators, funeral homes, and manufacturers of burial and memorial products.
However, funeral directors in every state reported a significant increase in cremation requests during the Great Recession, as it is a much less expensive option than burial.
Even after the recession, trends still indicate that people prefer cremation to burial because it’s more affordable.
Cremations produce lower profits. Consequently, investors seeking above-average revenues and earnings growth may wish to look elsewhere.
However, this is a mature industry. What it lacks in growth perspectives, it makes up in stability.
It’s best suited for investors looking for stability and income from a resilient industry that can outlast the worst of economic disasters.
Benefits of a Recession
I know what you’re thinking: “What? You’re crazy for thinking that anything good could possibly come out of a recession.”
Hear me out.
Most companies get hit HARD during recessions for inefficiencies that were laughed off during better times.
Essentially the economy is in reverse. It’s receding, not expanding.
A recession means a general “fat trimming” for most companies, from which they should emerge stronger.
And that’s good news for investors.
One of the best signs is a company in a hard-hit industry that is expanding anyway.
For example, McDonald’s (NYSE: MCD) continued to grow in the 1970s economic downturn even though most other restaurants were closing their doors and people chose to cook at home rather than eat out.
Similarly, Toyota (NYSE: TM) was opening new American plants amidst the downturn of the 1990s when the Big Three were closing theirs due to plummeting new car sales.
Recessions can be blessings in disguise to investors, as it is much easier to spot a strong company without all of the distracting white noise of a strong economy.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today