We’re probably already in the midst of recession right about now.
The TSX Index and S&P 500 are down around 30% at the time of writing over the coronavirus (COVID-19) pandemic and the oil price war. Jim Cramer is in the belief that fiscal policy is needed to avert a potential disaster that could result from this biological crisis. And I think he’s right on the money when he claims that the fate of the market lies in the hands of President Trump.
Even if you have faith that a more powerful fiscal stimulus package could be on the way, a recession is probably unavoidable at this point. But for investors, that’s fine because the stock market has already priced in a recession, and we’re likely more than halfway from hitting the bottom. That is, if we’re not already there after Black Thursday’s catastrophic implosion.
What to buy in a recession
A recession is defined as two consecutive quarters of negative growth. And given the havoc thus far, we’re likely in the first half of what could be a steep recession. So, if you’re looking to buy stocks for cheap, steer clear of cyclical stocks and look to defensives, as they’ll fair far better in these times of economic hardship.
For added protection, look to the consumer staples like Alimentation Couche-Tard (TSX:ATD.B), Loblaw (TSX:L).
Couche-Tard is one of the few defensive growth businesses out there that can stand to grow amid tough times. Unlike the Great Recession of 2007-08, we’re in the middle of a pandemic-driven recession, which is being caused by social distancing as the coronavirus (COVID-19) continues spreading across communities across the globe.
In such a fear-driven environment, people are less likely to want the cheapest product and more likely to pay up for a pricier product if it means they’ll reduce their contact to crowds. I’d argue that the convenience of ringing out a few rolls of toilet paper and food in three minutes is far worth the premium multiple on the items compared to wandering around a grocery store for 30 minutes, passing by tonnes of people and waiting in a crowded line to pay.
Given Couche-Tard’s pandemic-resistant traits, the 12% dip in the stock on Thursday, I believe, is nonsensical, opening up a window of opportunity for “risk-off” investors to pay two quarters to get a dollar.
Combine this with the fact that global turmoil is pressuring Couche’s peers, and I think Couche is more likely to acquire a firm like Caltex Australia on its terms. Indeed, Couche’s patience is paying off, and for investors, I think their patience will pay off, too.
Loblaw is one of many grocers that’s probably making a killing amid panic-buying of toilet paper, hand sanitizer, soap, food, and other supplies. The company sees the rising demand for such products, and it’s positioned to meet the demand and get a bit of a margin boost in the process with a modest markup (or lack of discount on any otherwise widely discounted products).
People are flocking to grocery stores to stock up on what could be weeks of self-isolation amid the growing pandemic. Ironically, the rise in grocery store crowds of late may be a major source of contagion. In any case, that’s not stopping herds from flocking to grocery stores for supplies that some believe may grow scarce.
Like Couche, Loblaw stock plunged 10.4% on Black Thursday and is another baby that’s been thrown out with the bathwater.
Be fearful while others are greedy. But don’t try to be a hero by buying the most damaged stocks within the most damaged sectors. Do be greedy, but also be picky. We’re likely in a recession, and you’re going to want names that can hold their own through this brutal year.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette owns shares of ALIMENTATION COUCHE-TARD INC. The Motley Fool recommends ALIMENTATION COUCHE-TARD INC.