Believe it or not, there is such a thing as a recession-proof stock. The conditions that occur during recessions do not seem to describe an environment favorable for any stocks, however, there are always companies that do well, even in difficult economic conditions.
How can an investor find these recession-proof stocks? As you'll see below, there are a few places to look that will almost always help you uncover gems that can boost your portfolio during a downturn.
On the Hunt for Recession-Proof Stocks
The key to finding recession-proof stocks is to look toward the sectors and industries that are generally more resistant to recessions and not as tied to the economic cycle. Traditionally, one of the best hunting grounds has been the consumer staples sector. This sector includes companies such as food and beverage makers, personal products suppliers, and producers of basic household products.
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Consumer staples are typically among the very last items that consumers would remove from their budget, even during difficult economic times. After all, people still need to eat, drink, and care for themselves every day, no matter the state of the economy. So while other companies might see their business decline in a downturn, consumer staples businesses can largely weather these periods. Examples of consumer staples stocks include cereal-maker General Mills (NYSE: GIS), beverage-giant Coca-Cola (NYSE: KO), and household product-maker Colgate-Palmolive (NYSE: CL).
A sub-sector of the consumer staples sector is the so-called 'sin' stocks. This arena includes tobacco and alcoholic beverage-producers. During strong economic times, people may go out and buy a big-ticket item such as a plasma TV. However, these sales fall during a recession, but it's doubtful a consumer will smoke less, or give up that evening beer, or even the chocolate bar. You're probably familiar with some sin stocks like Altria Group (NYSE: MO), Hershey (NYSE: HSY), and Diageo (NYSE: DEO).
More than Consumer Staples
Another traditional sector for investors to hide in during a recession is an area broadly classified as discount retail companies. As consumers' budgets feel the pinch of a recession, it makes sense that people turn to the retailers who offer them the most value.
Companies that fall into this broad category can include discount grocery stores, mega-giant retailers such as Wal-Mart (NYSE: WMT), deep-discount retailers such as Family Dollar (NYSE: FDO), and even some value-focused restaurants like McDonald's (NYSE: MCD).
Finally, one last place you can look for recession-proof stocks is in the utility sector. This only makes sense -- after all, people need to keep the lights on and the water running. That's why companies like Duke Energy (NYSE: DUK) are able to power through downturns, while seeing stable stock performance and usually high dividends.
The Investing Answer: Remember, just because a market is in a downturn doesn't mean there aren't places you can weather the storm. Recession-proof stocks may not always rise in a bear market, but there is little doubt they can help your portfolio maintain its value during tough times.
