As a basic rule of thumb, stocks tend to be poor investments during periods of economic contraction or turbulence. But there are of course numerous types of stocks and exceptions to every rule. While many sub-sectors and industries decline significantly when the economy and consumer spending slow, others actually thrive.
In recessionary environments, low-cost retailers see a surge in popularity. The following chart shows the performance of selected stocks between January 2008 and March 2009, when many broad stock market indexes lost close to half of their value:
The stocks highlighted above include:
- Wal-Mart Stores (WMT): one of the largest retailers in the country, known for low costs on a wide range of consumer items.
- Aaron’s (AAN): a rent-to-own furniture company that appeals to shoppers unable or unwilling to make the capital outlay required for couches, beds, and other home furnishings.
- Dollar Tree (DLTR): one of the largest chains of discount stores in the country, selling a wide range of products at deep discounts.
- Big Lots (BIG): a retail company with stores in 48 states, known for selling “close out” or overstocked merchandise as well as foodstuffs.
- Costco (COST): a membership shopping club and super store that sells items in bulk at discounted prices.
As shown above, four of these stocks actually increased in value during the 15-month period — though BIG experienced some huge price swings. Costco’s slump is initially surprising, but may have resulted from a decline in customers willing and able to pay the annual membership fee and make the up-front payments associated with a bulk purchasing model.
Wal-Mart and Big Lots feature moderate dividend yields, but have experienced slow revenue growth during the recent bull market. Aaron’s has significant room to increase its dividend, and has managed to deliver meaningful revenue growth over the past five years:
Dollar General (DG), which competes with Dollar Tree, was not publicly traded until late 2009, so was not included in the chart above.
It should be noted that it is possible that markets are indeed overvalued but that the underlying economy remains strong — a scenario that would differ quite a bit from 2008. While such an environment would likely still favor the “discount stocks” highlighted above, the gap between this group and the broader market would likely be much narrower than in 2008.
This article, The Best Dividend Stocks for Bearish Investors, first appeared on Dividend Reference.