Let’s be clear: no one knows for sure when the next recession is going to occur. Anybody. But that doesn’t stop big bank strategists or financial media thinkers from trying to make predictions. And particularly in recent times, concerns such as rising inflation, Fed policies and the ongoing pandemic are further complicating matters for investors.
There is, however, a solution you can take to position your portfolio based on what will happen next in the economy or the stock market. I’m talking about recession-proof stocks, which perform well in good times as well as in bad times. Here are two resilient retailers you might want to consider.
Winning the battle for discount stores
With sales of $ 33.7 billion in the past 12 months, General dollar (NYSE: DG) is the largest chain of discount stores in the United States. The Tennessee-based company has more than 17,683 general merchandise stores that sell snacks, cosmetics, cleaning supplies, clothing and more at prices mostly under $ 5. The company experienced strong growth during the pandemic, but in the most recent quarter, sales were essentially flat in the face of a difficult comparison a year ago.
Since Dollar General’s prices are so low, it does well in times of economic downturn as people try to save money. During the Great recession, revenues have not declined as the company’s value proposition for budget-conscious customers has strengthened. Fiscal 2020 was Dollar General’s 31st consecutive year of same-store sales (or comps) growth. The title was also a historic winner, beating the S&P 500 over the past three, five and ten years.
A remarkable 75% of Dollar General’s stores are located in cities of less than 20,000 inhabitants, giving the company a location advantage. This strategy does not make financial sense for many big box retailers, often leaving Dollar General as the primary outlet in these rural communities. Choosing these areas to build your stores, averaging 7,400 square feet, is also cheaper. It’s no wonder the company’s bottom line has soared 336% over the past decade.
Management still intends to add new stores at a rapid rate, with 1,050 openings planned for this fiscal year alone. Dollar General also pays a dividend, has been a perennial stock buyer, and is trading for a reasonable 21 times forward profit. Add this discount retailer to your cart if you are worried about a looming recession.
A booming auto parts chain
Another top-notch recession-proof company to consider is O’Reilly Automotive (NASDAQ: ORLY). Operating in a boring sector of the economy, this business flourished during the pandemic as consumers increased their spending on auto repairs. And the momentum is still going strong. In the most recent quarter, buildings jumped 9.9%. And this, after growth of 16.2% in the second quarter of 2020.
In 2008 and 2009, O’Reilly’s sales grew by 41.8% and 35.5%, respectively, as consumers suspended the purchase of new cars and invested in life extension instead. cars they already owned. But even in good economic times, people tend to drive more on average, which increases wear and tear on vehicles and sustains demand for the chain’s products.
O’Reilly’s competitive advantage stems from a robust distribution network, which is reinforced by more than 5,700 stores in the United States. Customers are not only do-it-yourselfers, but also auto mechanics who need parts as quickly as possible to keep their business running. This is the main reason the company defended itself against the threat of e-commerce. “In the last quarter, about three-quarters of our online sales were picked up in-store or shipped to-store,” CEO Greg Johnson said on the earnings call, demonstrating the immediacy of the product need.
After halving the number of shares outstanding since 2011, O’Reilly is channeling any cash flow left over from reinvesting in the company to buybacks, increasing investor returns. Plus, a futures price-to-earnings ratio of 22 for a company of this quality seems to make the stock a no-brainer.
There will always be fear in the minds of investors at all times. The best protection against this is to look for outstanding stocks that have proven to work in any macroeconomic climate. That being said, it’s not getting much better than Dollar General and O’Reilly.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.