“Winter is coming,” says Tony Robbins, well-known author, speaker, and entrepreneur, about the US economy.
For many of us, an economic “winter” is already here because of increasing unemployment rates and the single largest drop in DOW points in a day. It’s safe to say that we’re in a recession. So, that’s the bad news.
But, the good news is that recessions are natural, cyclical events in the stock market, meaning we can always expect them to occur and to be temporary (9-18 months). And after a recession, stock prices usually go back up.
So, if you find yourself vulnerable to the cold, the best thing you can do for yourself is take advantage of this time to prepare for this year’s economic “winter” and for the next one. (Because you can count on it coming back!)
To help you prepare, in this article we’ll be covering:
what defensive stocks are and how to use them in your portfolio
our top picks
and how to find defensive stocks on your own
Without further ado, let’s jump right into it!
What Are Defensive Stocks?
A defensive stock (aka recession-proof stock) is a stock that provides dividends and stable earnings regardless of how the market is doing. The key industries include: consumer staples, healthcare, utilities, and education/training services.
Historically, defensive stocks keep the economy afloat during a slower, declining market, and sometimes perform better than other stocks, due to slightly higher demands. But they typically don’t grow with an economic expansion.
The reason is that in both good and bad economic times, everyone still needs to eat, maintain good overall health, and have functioning utilities in their homes. However, defensive stocks historically don’t increase in price because people are not significantly eating or using more energy during economic expansions.
Another way to think about it is, people tend to stay in their homes and consume a bit more during the winter (recession) compared to the summer (growth/expansion). So if you want to take advantage of this “winter”, let’s jump right into some of our picks for the best defensive stocks.
Best Defensive Stocks To Weather the 2020 Recession
*Note: all the numbers and figures were taken from Yahoo Finance. You can track the stocks listed in this article and the overall market in real time.
1. B&G Foods, Inc.
(BGS) manufactures, sells, and distributes shelf-stable and frozen foods, and household products throughout North America.
Compared to other stocks in the same industry, like ConAgra, its annual dividend payout has been paid in increasing amounts over a 9 year period. And owning just 1 stock of BGS yields an annual $1.90, which is a 10% market return YTD.
Based on the 6 month activity of BGS in the figure below, it shows a slight upward trend. Its current price is currently higher compared to the beginning of the fiscal year. And although the price may not be significantly higher, there is apparent momentum, as BGS was able to push its P/E ratio from 9 to 16 over the last month.
Their plans for 2020 is to acquire the Farmwise Portfolio, which includes Veggie Fries, Veggie Tots, and Veggie Rings. This may be a smart investment choice because they are capturing the growing number of consumers who want vegetarian food options.
With its high annual dividend, an improving P/E ratio, and new developments, BGS stock seems profitable and at least worth watching.
2. Acme United Corp (ACU)
Acme United Corp is in the business that supplies cutting, measuring, first aid, sharpening, and safety products to the school, home, office, hardware, sporting goods, and industrial markets in the United States, Canada, Europe, and Asia.
The Company produces shears, scissors, rulers, first aid kits, utility knives, manicure products, medical cutting instruments, guillotine paper trimmers, and pencil sharpeners.
One thing to note about ACU is that it already has an established, international consumer base.
Additionally, ACU has consistently met and exceeded its quarterly EPS targets for 2019. Its debts are well covered by its assets. And earlier this year in January, ACU’s Canadian subsidiary acquired First Aid Central, a Canadian first aid and safety supplier with a 2019 revenue total of $4.3M. It’s 71.3M market cap and average trading volume of 11,000 shows that it is not being watched by many, which could signal an untapped market.
ACU pays an annual dividend of $0.48 per stock owned, yielding a 2%, which is the standard market return for 1 year on dividends.
ACU sounds like an overall sound investment based on its established global relations, recent expansions, and earnings based on meeting real needs. Analysts also recommend a strong buy on this stock.
Adtalem Global Education (ATGE)
ATGE provides educational and training services worldwide.
It operates through three segments: Medical and Healthcare, Professional Education, and Technology and Business. It’s a for-profit, higher education business model.
Its price has fallen since the lockdown began mid-March - but to be fair, so has the entire market, as indicated by DJIA and other major indexes’s mid-March performance. The important thing to note about ATGE’s price movements is that they appear to be stabilizing around $27/stock.
With the current demand and need to educate and train more nurses and healthcare workers, it’s likely that there could be a correlating increase in price.
A member of ATGE’s company, Chamberlain University, offers accredited nursing, social work, and public health programs. And they announced on 4/14/2020 that they are working to provide a free course to re-train nurses for acute care. This could help repair some of the reputational damages that ATGE has received over misleading recruiting practices in 2018, by training nurses and getting them to real, desperately needed jobs.
Perhaps ATGE could bounce back to its pre-pandemic prices of $35/share (as of 2/14/2020). But at the least, this defensive stock in education and training is worth watching.
How to Find Consumer Defensive Stocks
A general rule of thumb is to ask yourself, “What essentials goods and services do people need right now? Which ones are they actually buying? And which businesses are still operating?”
Remember that consumer defensive stocks are found among the consumer staples, healthcare, and utilities industries.
We recommend looking for consumer defensive stocks in the Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ indexes.
We’ve also helped refine the list a bit, and here are stocks that weren’t analyzed, but still worth checking out:
Archer-Daniels Midland Co (ADM)
Artisan Consumer (ARRT)
Casey’s General Stores (CSY)
Craft Brew Alliance Inc (BREW)
Dollar General (DG)
Coca-Cola Co (KO)
You can use Yahoo or Google Finance and the MorningStar Index to look at the history, price, and YTD earnings and other relevant info about each stock. And check out the StreetInsider for dividend payout history!
As an Investor (or future investor), you need to be in a position to forecast and predict market volatility before it happens.
If COVID-19 has taught us anything, it's that we need to prioritize diversifying our portfolios to prepare for future market turmoil.
For those who take advantage of it, the coming decade could return untold fortunes.
Also worth mentioning here are penny stocks. (If you want to learn more about penny stocks, check out our guides on how to invest in penny stocks and our top 10 penny stocks. We’ve put together a list of penny stocks to check out for this recession period, and potentially add into your portfolio.
American Pet Co Inc (AAPT)
California Grapes International Inc (CAGR)
American Heritage International Inc (AHII) - also a “sin stock”
Brown-Forman Corp Class B (BFB)
Blue Gem Enterprise (BGEM)
China Dongsheng International Inc (CDSG)
AiXin Life International Inc (AIXN)
In summary, defensive stocks are a great way to buffer yourself from the market’s downturn as a short term investment, because if you decide to hold onto them, they may pay dividends and increase in price.
That said, defensive stocks don’t typically grow with an expanding economy.
So when the winter season is over, do your due diligence and make sure to re-evaluate your stocks portfolio. This means keeping up with the company activities, balance sheets, and the trends of the market. Hopefully by next winter, you won’t need to rely solely on any one source of income, and can confidently say to death “Not today.”
And if you’re an individual investor interested in penny stocks to help diversify your portfolio, check out our article on our top penny stock picks to invest in now.
To supplement your reading further, make sure to check out our brand new COVID-19 Guide to Investing here.