The latest federal reserve meeting confirmed that inflation was indeed out of control and that there would most certainly be more pain ahead of us. Here are some key quotes which summarize the situation:
“We have got to get inflation behind us,” Mr. Powell said during his post-meeting news conference. “I wish there were a painless way to do that; there isn’t.”
The Fed Intensifies Its Battle Against Inflation
Powell warned in a speech last month that the Fed’s moves will “bring some pain” to households and businesses. And he added that the central bank’s commitment to bringing inflation back down to its 2% target was “unconditional.”
Powell’s stark message: Inflation fight may cause recession
We are looking at difficult days ahead where even traditional value stocks may struggle in a recessionary environment. As such, in my opinion, portfolios (or at least a fraction of our portfolios) should always be kept dynamic. This means that if you have a selection of stocks that you have really high conviction in, by all means DCA into it at your own discretion however we should always be open to other stock ideas which may or may not be more “fitting” to hold depending on economic circumstances.
Of late, I’ve been doing a lot more research into stocks that perform well during recessions. I’m looking for stocks that are less cyclical in nature as they typically tend to hold their worth in both good times and bad.
A relatively easy way to think about this is how a luxury-hospitality operator may see fewer bookings during a recession where consumers typically spend less on luxury experiences. On the other hand, a company producing toothpaste would most likely see its revenue remain constant despite economic circumstances unless another solution to toothpaste is invented.
From my research, industries that analysts consider to be recession-resistant include:
- Healthcare – Hospital, Medical Drugs, Medical Suppliers etc.
- Consumer Staple (Producers) – Food, Drink, Shampoo, Shavers etc.
- Consumer Staple (Retailers) – Costco, Walmart etc.
- Utility – Energy, Gas, Waste Collection, Mobile Networks?
In this article, I’ll be focusing on the consumer staples sector as I’m looking to go more in-depth into a more familiar industry.
What are consumer staples?
Think of consumer staples as good/services that we need in order to survive.
Examples would include things like oxygen, food, water, shelter. One level above that would be things that we use on a day to day such as shampoo, toothbrushes, shavers, hygiene products etc.
While the classifications can go deep, at face value, what we can assume is that all these good and services belong to a category that “individuals are either unwilling or unable to eliminate from their budgets even in times of financial trouble“.
Why consumer staples in times of recession?
If we look solely at performance, we can see that Consumer Staples (represented by ticker symbol XLP which is the Consumer Staples ETF) are indeed in a forever-bull market.
Even in times of recession (2020, 2018 & the dotcom crisis), we see the index falling by 40% at its worst which some may deem to be acceptable especially if you compare it against the likes of some recent high-growth stocks.
Investors consider consumer staples to be somewhat of a safe heaven during bad times as consumers will still need the utility from them despite economic circumstances. The drawback to this is that in economic booms, the price action of consumer staple companies often tend to lag behind leading market indexes as their demand would still remain muted.
While an index fund like the XLP can be one for investors to consider, I often prefer the fun behind stock picking. As such, I’ve shortlisted these 5 consumer staple stocks not just based on the consumer staple ‘filter’ but also based on one or more of the following:
- Profitable (Mandatory, the company must be profit-generating)
- Performed well during past recessions
- Company is a product of their respective goods/services. (Hold the IP, not merely a retailer)
- Technicals : Price action currently NOT at all-time highs.
- Fair Value : Comparing against benchmark S&P PE of 15
5 recession resistant consumer staple stocks
1) Coke (NASDAQ : COKE)
Legend has it that Buffet himself consumers 5 cans of coke a day. While that can’t be ascertained, what most certainly can is how Coke has certainly returned investors about 5x their investment should you have bought it 5 years ago.
With Coke, what investors are really buying into is the idea that consumers will consume coke (and its associated brands) be it rain or shine. This hardly seems debatable at all given that a can of Coke sits in the pantry of most households and even if its not, is most likely available in every convenience store near you.
While Coke is indeed on the top of my list, I’m adamant that a stock’s all-time high (ATH) is never a buying zone hence with their current price at about 1/3 off their ATH of $650, the risk-to-reward does look adequate.
Valuations also seem fair given that they are sitting at a PE of 14.85. At the very least, with respect to all the gains that Coke has delivered to investors over the years, they do most certainly deserve a spot on your watchlist.
2) Proctor & Gamble (NYSE : PG)
Most of us would know PG as the “shaver/toothbrush” brand or we would know this company as the Dividend King!
The term Dividend King is coined as a term to describe companies that pay an increasing dividend for…forever pretty much. It’s safe to say that PG truly embodies this term given that their dividend per share has increased consistently over time.
As one of the few stocks which have remained green in my portfolio this year, I must say that I do have some investor bias towards this company. However, truth be said, PG is still overvalued as compared to the S&P as their PE sits at 23.35. While they are about 20% off their ATH, caution is advised as there may be room for further correction in the weeks ahead.
In terms of their performance during recessions, it is safe to say that bearish sentiments never took hold of this stock for long. as the stock never feel by more than 50% even during the .com crash back in 2000.
3) Tyson Foods Inc (NYSE : TSN)
Most of us here would be unfamiliar with Tyson Foods unless you’re in the chicken trade (like myself a couple of years back) but Tyson Foods is essentially one of the world’s leaders in poultry production. Apart from poultry, have about 35 different brands with them where they have production in beef, pork, processed meats and even prepared meals.
I’m bullish on Tyson Foods as if I had to be honest about one thing it would that in times of recession, consumers are surely going to eat out less and unfortunately rely more on processed meals to reduce the cost of living.
We don’t feel it so much here in Singapore but coming from a country like America where a simple meal would set you back by $20 or more (a reference to the Prawn Mee in NYC latest Urban Hawker), consumers just won’t be able to keep up with that once unemployment kicks in.
Valuations wise, I must say of all the stocks discussed here, I’m liking TSN the most as the decline has been attributed to “challenging macroeconomic conditions” however I am confident that their costs will be able to be passed on to their consumers which is another hallmark of a good consumer staple company.
With their PE at a mere 6.27, their stock definitely screams buy however investors seem to have stayed away from the stock as they have indeed disappointed investors with their recent earnings. The stock trades at 30% off their ath testing the near-term support of $70 which is right smack between their $40 low and $100 high. Touching just 32 on the Weekly RSI, this stock is indeed at oversold territory.
4) British American Tobacco (NYSE : BTI)
Here is a topic filled with controversy.
I’m not going to be too opinionated on this stock due to its sensitive nature hence I’ll just be reporting facts for this company.
- PE = 13.83
- Dividend Yield = 7.63%
- ATH = $73. Stock is currently at $36.
This stock may not necessarily be a hedge during recessionary times but in the essence of having a balanced portfolio filled with different sectors of consumer staples (Food, Shampoo, Drinks etc.) , tobacco should not be neglected.
Do take note that the valuations amongst its peers seem to be consistent hence the stock being adequately valued may not necessarily mean its a buy.
5)The Kraft Heinz Company (NASDAQ : KHC)
Very much like TSN, I think that the narrative is set for KHC should a recession hit us hard. The thesis for this is that KHC has been losing market share for years as consumer preferences shift away from Mac & Cheese (from a box) to like real food? Honestly who even eats Mac & Cheese from a box these days? Easy for me to say now but who’s to say what consumers will eat when push comes to shove?
Note that from the price action perspective, this stock is far from its $100 ath back in 2017 as following that, it reached its all-time low of$20 back in 2020 and has since recovered to the $30s after forming a key resistance level at $45. If anything, this stock appears to respect psychological price points given how all its support and resistance levels are whole numbers.
While this stock can be considered ‘cheap’, investors should always be cautious when something is overly cheap as the reason for the weakness in KHC was due to its high debt during their merger. (Even Buffett made a mistake with this one).
Investor sentiment for this company also seems to be at an all-time low as they deal with declining earnings due to the stress on their manufacturing from inflation. A company like KHC is highly dependent on the cost of raw materials (for the production of their sauce etc.) is most certainly at the mercy of inflation.
Depending on which side of the fence you’re on, the months ahead would most certainly interesting for this company.
Preparing our portfolios for a Recession, grim but necessary…
I hate to be the bearer of bad news but as investors, we should always be prepared for the worst. At present, I have indeed shifted quite a bit of my portfolio into some of these more defensive and non-cyclical plays. Even if a recession doesn’t hit us, companies like Coke and PG are fundamentally strong and will hold their ground despite economic circumstances.
Two more rate hikes left for the year, let’s hope they remain at 0.5% each time or we’re really just at the tip of the iceberg here.
