Another down week for the U.S. stock market has fueled fears that the country is on the precipice of its first economic recession since dark days of the Financial Crisis. While many shareholders are asking themselves just how bad the economic downturn could get, investors in Ross Stores, Inc. (ROST), Dollar Tree, Inc. (DLTR) and H & R Block Inc (HRB) are asking a completely different question: Who cares?
Certain groups of investments, such as consumer staples stocks, healthcare stocks and apartment REITS, are typically considered defensive plays in times of economic weakness. However, despite relative outperformance, the iShares FTSE NAREIT Resi Index Fund (REZ), the Health Care SPDR (XLV) and the Consumer Staples SPDR (XLP) all generated negative returns in 2008 when the S&P 500 declined 37% on the year.
If you’re looking to do a bit better than limiting your losses during the next recession, here’s a closer look at three stocks — ROST, DLTR, and HRB — that are well-positioned to thrive during a hypothetical 2016 recession.
Sure, if we don’t learn from history we can be doomed to repeat it. And if we do learn from history, we can actively seek to repeat it: Each of these stocks soared during the last market collapse.
H & R Block (HRB)
There’s an old saying about death and taxes, and the IRS doesn’t have much sympathy for taxpayers during a recession. In 2008, H&R Block gained 22.0% during the market collapse, and the stock is basically trading sideways so far in 2016, while the S&P is down a whopping 11%. HRB stock pays a 2.4% dividend and currently sports a reasonable 14.5 forward P/E ratio.
Rivals Intuit Inc. (INTU) and Liberty Tax Inc (TAX) are also dividend-paying stock options for a recession, but HRB is the only one of the three without long-term debt on its books.
Dollar Tree (DLTR)
It should come as no surprise that discount retailer Dollar Tree thrives during periods when consumers are pinching pennies. DLTR didn’t just weather the downturn in 2008, the stock surged 64.7%, a spectacular performance in even the strongest economy. So far in 2016, Dollar Tree hasn’t come close to a repeat of its 2008 performance, but its 4% decline is still a full seven percentage points better than the benchmark S&P 500.
Wal-Mart Stores, Inc. (WMT) is another resilient discount retailer, and WMT shares gained 19.5% during the 2008 downturn. However, Walmart has been dealing with the growing pains associated with its e-commerce transition and competing with the likes of Amazon.com, Inc. (AMZN). Dollar Tree rival Dollar General Corp. (DG) is another discount retail option, though the stock’s 2009 IPO means that it lacks the recession track record of Dollar Tree.
Ross Stores (ROST)
ROST stock has demonstrated in recent years that it does just fine regardless of economic conditions, gaining 212% in the past five years. The company has expanded its presence to over 1,400 locations but has also managed to expand its profit margins along the way, all the while eating into the market share of higher-priced department stores.
Just this week, Cowen & Co named ROST its top recession retail pick. During 2008, the discount clothing retailer booked an impressive 18.8% gain, and its 2.6% loss so far in 2016 has once again demonstrated its immunity to severe market downturns.
Bottom Line
Just because the U.S. may soon be experiencing another recession doesn’t mean that you can’t make some good returns owning stocks in 2016. ROST, DLTR and HRB are proof that there are still plenty of good trading ideas that have worked during even the darkest economic times.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
