By Vishweshwar HS, www.showmytrade.com
The recent Coronavirus pandemic (Covid19) has pushed the world stock market into recession. A sad situation like this creates excellent investment opportunities for long-term investors.
Investors need to carefully monitor the stock market for excellent opportunities to buy high-quality assets that are available at discounted prices. No doubt, it is a challenging environment, but it also provides the best opportunities!
The high debt, cyclical, and speculative valuation companies during recession time are risky for investors because these companies’ businesses may fail or be subdued for many more years. The ideal investments for long-term investors are the companies that can withstand the pressure of the recession.
Historically, high-quality companies with a strong balance sheet, low debt, and steady cash flow from operations are proving to be a good investment. These companies generally give attractive returns when economic situations return to a healthy growth path.
High-Risk Stocks
The investor must avoid those companies which have high debt, cyclical and valuation-rich (speculative) companies. During a recession, these companies’ business models are adversely affected.
Companies with high leverage
It is common practice the company raises debt for growing the company. But in a recession time, these companies are struggling to make their loan payment. They also face low revenue due to depressed sales. High leverage results in unsustainable debt to equity ratio. There is a high chance such companies go bust. Hence it is advisable not to buy such stocks during the recession period.
Companies with Cyclical in Nature
When an economy is in a rapid growth phase, employments level, consumer confidence is high. During the boom time, the general public has more discretionary income to spend on non-essential or luxury items. The general public buys more products like high-end cars, travel, consumer durables, furniture, or clothing.
If the economy turns down to a recession, there will be a high unemployment level, and consumers’ confidence will be at a low point. At this point, the general public significantly reduces or cuts back their spending on this luxury or non-essential spending. There will be less consumption of products/services like cars, travel, consumer durables, furniture, or clothing. Low use of luxury goods or services results in lower sales and reduced margins. It will be a less attractive investment for investors during a recession.
Companies with Very High Valuation or Speculative Stocks
During the boom time, certain individual stocks will catch the fancy of the bulls. The stock’s price will reach exceptional high or extreme speculative levels. Such risky stocks' Price-to-Earnings (P/E) ratios will be multiple times than the common shares. During the recession, profit books will happen at a high price. The value of shares will continually start falling rapidly. Investors need to be careful of such stocks. If not, a considerable or significant loss can happen to the portfolio, especially in a recession time.
Historically, some companies do well during a recession. Investors might switch to developing a strategy based on counter-cyclical stocks with strong balance sheets in recession-resistant industries.
The company, which gives regular dividends, massive balance sheet study does well in the recession period. The utility companies, consumer nondurable, consumer staples, defense stocks fall in this category. These companies are doing well in the recession, and when the economy expands, the investors switch to growth kind of companies.
The companies with have low debt on the books, robust pipeline of cash flow, and generating healthy profit are reliable balance sheet companies. During the recession, investors like such companies as the business model are quite robust.
During recession time, the companies’ products/services used by everyone in daily life are generally the right choice for the investors.
Companies like retail/grocery, daily consumer essentials, deep discount stores, liquor manufacturing, cosmetics, and entertainment companies.
It is significant to change the investment strategy according to boom or recession time. During the recession, an investor should avoid high debt, cyclical, and speculative stocks. These stocks significantly lose their stock price. Some of the companies may even bust.
It is highly advisable to invest well managed, steady cash flow, strong balance sheet, profitable and recession-proof companies/stocks. Historically the utilities, consumer nondurable, discounted retail, liquor manufacturers, and entertainment companies are good for investment.
Kindly share your comments on the “What Types of Stocks to Buy During a Recession?” below. Any suggestions regarding this article will update in the next edition.
Thanks for reading.
Good Earning!
