We might not know exactly when the next market crash is coming, but we know it’s a certainty to occur at some point. Accepting market cycles is part of investing, but preparing your portfolio for downturns can be an important part of protecting your gains. If your allocation is too risky, you might want to consider adding stocks that perform well during recessions and market downturns. These usually won’t give you spectacular growth during bull markets, but they probably won’t tank nearly as hard as the high-flyers.
Stability with utilities
Utilities is one of the classic defensive sectors that is known to perform well during recessions. When people reign in spending on housing, big-ticket items, vacations, and dining, they are less likely to turn off the electricity, water, or heating in their homes. As a result, utility providers have relatively stable businesses that tend to have slow growth and limited disruptions across economic cycles.
Eversource Energy (NYSE:ES) provides natural gas, electricity, and water utility services to 4.3 million customers in Connecticut, Massachusetts, and New Hampshire. The stock’s forward P/E ratio of 21.9 and enterprise value-to-EBITDA of 14.1 are low enough in the current market to provide a relative cushion if valuations were to drop in a market crash. Eversource also pays a 2% dividend yield to provide returns while you ride out a downturn. Risk-averse investors will also like the fact that Eversource carries relatively low debt among utilities, with debt-to-equity ratio of only 1.17 and a 3.88 interest coverage ratio.
During tough times, consumers still purchase groceries, household items, and home-care goods. Companies that own popular consumer staples brands are often less volatile during recessions and market crashes. They’ll never be great sources of growth, but they’re stable.
Procter & Gamble (NYSE:PG) offers consumer packaged goods in the home care, cleaning, beauty, grooming, and personal care categories. The company’s portfolio includes numerous well-known brands, including Bounty, Crest, Dawn, Downy, Febreeze, Gain, Gillette, Head & Shoulders, Oral-B, Olay, Pampers, Pantene, Tide, and Vicks. A broad portfolio of basic goods sold in 70 countries is going to hold up well in any recession, so Procter & Gamble’s fundamentals will remain steady.
This isn’t the type of stock that will ever attract soaring valuation multiples, so there’s less room to fall when the market crashes. P&G trades at a modest forward P/E ratio of 22.9 and EV/EBITDA of 16.2, so the share prices are anchored by the company’s profits. The stock also pays a healthy 2.5% dividend yield at a sustainable 59% payout ratio. That’s a decent return for when the market tanks.
Discount stores experience more demand during recessions
Consumers become more discerning during income insecurity. Total retail spending usually decreases during recessions, and budget-conscious households start bargain shopping. Retailers that can provide basic goods at attractive value actually experience increasing demand as people substitute away from more expensive items.
Dollar Tree (NASDAQ:DLTR) operates more than 15,000 dollar stores in 48 U.S. states and Canada. While the S&P 500 was falling more than 40% from 2007 into early 2009, Dollar Tree shares were actually roughly where they started. General merchandise of basic goods at the lowest price point brings obvious value to consumers. If the next market crash is caused by weak economic conditions in the U.S., then Dollar Tree’s financial performance is likely to remain steady.
Dollar Tree shares trade at a 17.2 forward P/E ratio and EV/EBITDA of 16. Investors looking to limit risk in their equity portfolios are likely to increase holdings in this stock, which should limit losses during the next market crash.