When confronted with the realities of a recession, many investors run for the hills and won't touch anything but treasury bonds or short-term CDs. Companies in certain industries, however, have historically outperformed the stock market as a whole during periods of economic contraction and uncertainty. These include companies that sell everyday consumer items, business-efficiency technology and health care. They tend to have plenty of cash on hand and strong balance sheets, which are key assets that allow them to endure recessionary times.
Discount Retailers and Manufacturers
National discount retail chains provide a haven for cash-strapped consumers who must still buy shirts and shoes, pots and pans, and gloves and galoshes. These are not generally discretionary goods such as barbecues and bicycles, so investors who remain in the market during recessions typically go for sellers of essential goods and the manufacturers who produce them.
Companies that sell everyday items typically experience strong competition, but those that can leverage their size and buying power tend to perform well in both recessions and expansions. Drugstore chains, fast food restaurants and other ubiquitous stores that seem to occupy every other street corner do not fear recessions as much as others. Consumers must still buy shampoo and soap, aspirin and allergy pills, and a broad array of other relatively inexpensive yet necessary things. As for fast food, it is both quick and cheap, two watchwords during recessionary times.
Technology companies have become quite adept at proving to potential customers the cost savings that accompany increased efficiency. This encompasses a wide range of software, hardware and automated manufacturing technologies that allow companies to produce more for less money, which goes straight to the bottom line. Many technology companies do not pay dividends, preferring instead to put much of their profits back into research and development, which often leads to further growth and higher profits in a cycle that investors value.
Drug and Biotechnology
Patients who have become dependent on their diabetes and kidney medications, and the insurance companies that pay much of their cost, are not going to cut back and shorten their lives because the economy is contracting. As a result, companies that produce patented drugs and maintain productive research and development pipelines can count on consistently steady cash flows.