Let me begin by noting that a looming housing bubble crash, if it materializes, will be catastrophic. Consumers only need to look back to the last housing crash to understand that it probably isn’t something we should hope for en masse.
That said, there are multiple factors currently conspiring which have led many to believe that a crash will occur. It is currently very difficult to buy a house. The intense competition has caused prices to rise. There are many reasons for this phenomenon. As a result of the novel coronavirus pandemic, the shift toward work at home has accelerated.
While commercial real estate has floundered, the opposite happened in residential real estate. Residential real estate is extremely strong, causing some concerns that it may have entered bubble territory.
There are concerns regarding forbearances and the mortgage moratorium. The worry is that when the moratorium is lifted, a wave of defaults will ensue.
If this becomes a housing market bubble crash, we can assume that it will pull the economy into a recession as in 2008. That means a rotation into defensive stocks at large is where smart money will be. Stocks like Genworth Financial (NYSE:GNW) and AIG (NYSE:AIG), which performed horribly in the wake of 2008, should be sold. So any stocks with significant exposure to the housing markets or housing derivatives are gone.
So, what would be the smart defensive stocks to consider now?
- American Water Works Co. (NYSE:AWK)
- NextEra Energy (NYSE:NEE)
- Smith & Wesson Brands (NASDAQ:SWBI)
- Spectrum Brands Holdings (NYSE:SPB)
- WalMart (NYSE:WMT)
- Costco (NASDAQ:COST)
- Reynolds Consumer Products (NASDAQ:REYN)
Housing Bubble: American Water Works (AWK)
If a housing market crash materialize, it will likely trigger another recession, perhaps bigger than the 2008 crash. In that case, as in the case of all recessions, defensive stocks will rise. One of the best classes of defensive stocks is utilities. Even in recessionary times people need electricity, water, and all other utilities.
American Water Works is the largest and most geographically diversified publicly traded water and wastewater utility company. The company is attractive not only based on the somewhat apocalyptic catalysts I just outlined, but also because it is operationally sound.
In 2019, the company reported EPS of $3.43, which increased to $3.91 in 2020. Investors will be happy to know that the company has given guidance that it expects an EPS of between $4.18 and $4.28 throughout 2021.
The company boasts 53,000-plus miles of pipe, 609 water treatment plants, 150 wastewater facilities and 75 dams. These are vital components of daily life that will continue to produce revenue in even the worst of times that a housing bubble implosion would thrust onto people.
NextEra Energy (NEE)
Continuing along the previous theme of utilities stocks is NextEra Energy. The Florida electric power and infrastructure company employs roughly 14,000 people and will remain vital, whether the housing bubble bursts or not.
Right now 12 of the analysts covering the stock give it a “buy,” two believe it’s “overweight” and seven rate it a “hold.” That’s respectable, but in the event of a bubble burst, those ratings would rise as investors would flood in. This is because it would be one of the few companies which would almost certainly continue to pull in revenue.
Another point of attraction for NextEra Energy is that the company is the world’s largest producer of wind and solar energy. In fact, the company claims that it is the world’s largest utility company. It is geographically diversified across the continental United States with significant operations in the country’s population centers. It is especially concentrated in New York, Florida, California, and south to north from Texas to Minnesota.
The company showed strong growth with its recent Q1 earnings release on April 21. First-quarter earnings hit $1.33 billion, up from $1.17 billion in Q1 of 2020. That translated to an EPS of 67 cents per share, up from 59 cents per share last year. The company is one to strongly consider in good times, but one to specifically consider in the worst of times.
Housing Bubble: Smith & Wesson Brands (SWBI)
Let’s switch gears here a bit and consider how consumers might react in the event of another housing crash. My guess is that people will react in a more extreme manner than during the 2008 crash. Given how much chaos has ensued as a result of the novel coronavirus pandemic and many other things, the U.S. feels more like a tinderbox than I’ve ever witnessed. That should mean that gun sales would spike in a housing bubble implosion.
Gun sales didn’t spike during the housing bubble of 2007. They did spike following Barack Obama’s 2008 election, following the Sandy Hook tragedy, and then again during this pandemic. I’d venture to guess that people would be stocking up if this bubble bursts because 2021 is not 2007. The dynamic is simply different. If that is indeed true, then SWBI stock would profit.
In fact, Smith & Wesson is already in a boom period. On March 4, the company reported record quarterly net sales of $257.6 million, plus record net income of $62.3 million. In the first quarter of 2020 Smith & Wesson recorded net sales of $127.4 million. That means that sales more than doubled in the first quarter of 2021.
Gun sales tend to spike around mass shootings. This trend has proven true in light of recent tragedies. More to the point, gun sales are already on pace to break 2020’s record sales of 22.8 million guns sold. Not that they need another catalyst, but a bubble burst would probably be a strong one.
Spectrum Brands Holdings (SPB)
Let’s switch gears out of the word of doomsday scenarios and into the less controversial one of consumer products and essentials. That’s what Spectrum Brand Holdings is, a diversified home essentials holding company.
The company has four separate business lines including pet care, hardware and home improvement, home and garden, and home and personal care. Some of its brands like Black & Decker, IAMS, Nature’s Miracle, George Foreman, and Black Flag are household names, while the company may not be so well-known.
In any case, the company is a large one and generated $4.0 billion in 2020 net sales. The company’s sales increased by 4.3% through the first nine months of 2020. Only hardware and home improvement faltered, and only by a modest 1% from 2019 to 2020. The company saw pet care sales rise by 10.6% and home and garden rise by 8.6%.
The company is worth a look at any time and is especially attractive now considering that its EPS hit $2.13 in Q1. That EPS was anticipated to be a much more modest 77 cents.
Housing Bubble: Walmart (WMT)
Another defensive stock that thrives in the worst of times, Walmart is also worth a look now. If analyst guidance is to be believed, WMT stock currently makes sense as an investment. Wall Street’s average target stock price for WMT is $158, well above its $139 price right now.
Because Walmart is such a large company there are a lot of ways to break down the company. One of the less talked about aspects of the company is its e-commerce efforts. Most people associate the company with brick and mortar retail operations. Amazon (NASDAQ:AMZN) is top-of-mind when it comes to e-commerce.
However, Walmart knows that in order to maintain its lead as the No. 1 retailer, it needs to win back market share from Amazon in e-commerce. Walmart generated $560 billion in revenue in 2020, and in Q4 e-commerce grew by 69%. Overall, Walmart recorded record revenues of $152.1 billion in Q4.
If the housing bubble pops triggering a recession, Walmart is still going to be strong.
Dollar General Corp. (DG)
Readers who think back to the 2008 recession may remember that Dollar General managed to perform well during that period. The simple reason was that consumers flocked into discount stores. Cheap consumer goods and a recession would be a boon to Dollar General’s business.
That’s actually the narrative that describes the company’s current situation. Net sales increased by 21.6%, to $33.7 billion in 2020. The company’s footprint includes 17,000 locations across the U.S. and it plans to open an additional 1,050 stores in 2021.
The company hasn’t simply grown because it is a defensive stock and these are arguably defensive times. Rather, it has shown steady net sales increases each and every year since at least 2017. Since then sales have increased 53%, from 21.986 billion to 33.746 billion. In the same period, net income has risen by 112% pointing to a consistent multi-year period of improved efficiency.
That’s a strong part of the reason that Wall Street almost unanimously agrees that DG stock is a buy.
Housing Bubble: Reynolds Consumer Products (REYN)
Reynolds Consumer Products is another company whose stock Wall Street loves. REYN shares are also nearly a unanimous buy. Everybody reading this article has likely used a Reynolds product at least once. I’d venture to guess that most will have its products in their homes whether it’s Reynolds wrap, Hefty trash bags, or any of the company’s other products.
In any case, REYN shares are a strong defensive bet in recessionary times ensuing from a housing bubble burst.
Reynolds Consumer Products’ revenue increased from $3.032 billion in 2019, to $3.263 billion in 2020. The increase was pretty much in line with the company’s revenue growth for the past five years. My guess is that the company hasn’t yet been appreciated as a defensive position because economists haven’t termed our current situation as a recession.
That isn’t to imply that we are in fact in a recession, but rather to point out that a recession triggered by a housing implosion would likely be reflected in Reynolds’ net revenues.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.