The Top 10 Depression Stocks

Really? The top 10 depression stocks? That's a preposterous headline -- that's what you're probably thinking.

But when I asked "Is This the Market Bottom?" on March 6 (it was a lucky guess), one striking piece of data came out of my research: Despite the conventional belief that the Great Depression was a terrible time to invest, investors who bought stocks in 1931 -- just prior to a 71% market drop -- would still have broken even in less than five years!

And stocks that the average investor bought after they became even cheaper -- say, at the start of 1932 -- would have multiplied in value more than 15 times during the next 22 years:

Returns

T-Bill Investment

Stock Investment

1934

1%

39%

1939

2%

134%

1944

3%

238%

1949

6%

462%

1954

14%

1,543%

Sources: Ibbotson Associates and author's calculations. Assumes reinvested dividends.

Some did even better
And then there were the best Great Depression stocks -- those that surpassed even these excellent long-term returns. Despite the recent market run-up, the economy remains dicey -- unemployment rates are still rising, rivaling what we saw at this stage in the Great Depression. So, I decided to write this follow-up to my recent column profiling the top 10 stocks from the last recession to see what lessons we can learn that would help our investing.

Here are the top 10 Great Depression stocks:

Company

Industry

Return, 1932 – 1954

Electric Boat

Defense

55,000%

Container Corp. of America

Packaging

37,199%

Truax Traer Coal

Coal

30,503%

International Paper & Power

Paper, Hydroelectric Power

30,501%

Spicer Manufacturing

Auto Parts

26,221%

Bulova Watch

Watches

24,146%

Zenith Radio

Radios, Televisions

24,146%

Douglass Aircraft

Aerospace/Defense

23,586%

Minneapolis Honeywell Regulator

Thermostats, Aerospace/Defense

21,608%

Crown Zellerbach

Paper

21,403%

S&P 500

 

1,543%

Source: Center for Research in Security Prices at The University of Chicago Booth School of Business, in SmartMoney, Ibbotson Associates, and author's calculations.

While it's tempting to conclude from this list that basic manufacturing stocks will lead us out of this recession, it's not totally clear that this generalization applies, because manufacturing makes up a much smaller portion of our economy today.

Three of the top 10 Depression stocks -- Electric Boat, Douglass, and Honeywell -- were members of the defense industry. And if you dig a bit further into their histories, you'll find that another five supplied the war effort or benefited indirectly.

So, what lessons can we draw from this information?

1. Searching for today’s "defense stocks"
We shouldn't assume that defense heavyweights like Boeing and Lockheed Martin will repeat the performances of their Great Depression counterparts. At the height of World War II, defense spending as a percentage of GDP was 10 times what it is now.

Instead of military spending, today the government is pouring billions into combating what Buffett has called "an economic Pearl Harbor." But the names of the top 10 depression stocks suggest that it won't be easy to predict which companies will benefit most. Who would have guessed that International Paper, Zenith Radio, and Bulova Watch would begin selling the military ultra-strength shipping crates, bomb fuses, and aircraft instruments, respectively? It definitely wasn't obvious that the disruption of European paper imports would cause wood pulp prices to spike and boost paper maker Crown Zellerbach's earnings some 30%.

Likewise, it's not clear whether broadband upgrades will primarily benefit telcos like Qwest, BlackBerry-maker Research In Motion, or Google (Nasdaq: GOOG  ) . Will electronic medical records help Quality Systems, which performs those upgrades, or lower health-care costs for UnitedHealth Group (NYSE: UNH  ) ?

As during the Depression, there will be real beneficiaries of the government's response to this "economic war," but the names of the top 10 Depression stocks suggest that it won't be easy to figure out who the primary ones will be.

2. The eternal recurrence
I was surprised that not one financial stock made the list of even the top 50 Depression stocks! With some 9,000 bank failures between 1930 and 1934, I had expected shares of surviving banks to soar as they gained market share and their beaten-down valuations rebounded.

But a 1933 Federal Reserve study explains that the banking system, which had been growing faster than both the U.S. population and the overall economy for years, had been overbuilt to the point of declining profit margins and loan quality.

Like the 1930s, today's banking industry appears to be undergoing a massive correction after years of insane overbuilding. At its peak in 2006, financials made up an absurd one-quarter of the entire stock market capitalization. Returns on assets for banks like Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and WaMu were below even withered 1920s industry levels, and they still have terrible loans on their books.

So, while we will probably see some big winners emerge from the beaten-down financial industry, the fact that it may not return to its former size suggests that there could be fewer big winners than many expect. If you're going to be investing in banks today, you'll need to have a firm understanding of their liabilities, the strength of their assets, their business models, and their management teams.

3. Buy the best
Many of the top Depression stocks had competitive advantages, which are especially important in a tough economic environment. They help retain business when customers are cutting back and ensure that the company can continue to operate profitably. Here are just a few:

  • Economies of scale: International Paper, which was formed in a gigantic merger between 17 pulp plants and paper mills, was big enough to squeeze suppliers in its early years and fund massive R&D projects later on. Intel (NYSE: INTC  ) , whose R&D budget is almost the size of Advanced Micro Device's revenue, fits that description today.
  • Proprietary know-how, installed customer base: The Navy had relied on Electric Boat to make high-quality submarines since 1900. Cisco (Nasdaq: CSCO  ) is the go-to specialist for many businesses today.
  • Brand: Bulova Watch, which introduced ladies' watches, clock radios, and electric clocks, was known for quality and innovation. Today, Apple (Nasdaq: AAPL  ) resembles Bulova.

How to invest during depressions
The list of top 10 Depression stocks, along with the experiences of some of the world's most successful investors (Templeton, Graham, and Buffett), demonstrates that economic downturns can be a great time to pick up bargain stocks. It also shows that macro events can have surprising winners, so investing on that basis can be tricky. Finally, it teaches us that companies with competitive advantages often perform especially well in uncertain times.

Our Inside Value team is seeing a number of companies with strong competitive advantages trading at bargain prices today. If you'd like some help getting started, click here to see our favorite stock ideas free for the next 30 days.

Ilan Moscovitz owns shares of Apple and Google. Apple, UnitedHealth Group, and Quality Systems are Stock Advisor recommendations. UnitedHealth Group and Intel are Inside Value picks. Google is a Rule Breakers selection. The Fool owns shares of UnitedHealth Group and covered calls on Intel. The Fool has one of The Top 10 Disclosure Policies.


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  • Report this Comment On June 12, 2009, at 6:42 PM, markdgls wrote:

    "Yeah, right!"

    As I recall from readings about the Depression, the categories that did not suffer were BREAD, BOOZE, BEER, and BOWLING. I believe that unemployment figures, lost mortgages, business failures almost dictate those 3 categories are going to be mid-term winners.

    As an owner of an RV Resort, I see not only a reduction of RVers coming through, but a large class of families who have lost their homes and are camping in tents or at best 2nd hand RVs. These families, for the most part, were middle class, and nearly lost, trying to find anything to pay their bills and find food.

    My in-laws told stories about sleeping in orchards while they were pickers and receiving brass tokens in lieu of cash. The first time they had a quarter of real money, they decided in favor of a motor camp so they could take a shower.

    Peace.

  • Report this Comment On June 17, 2009, at 5:38 PM, TimothyVR wrote:

    I have been reading Phil Fisher's books on investing. He describes his own investments during the Depression, and how very small amounts added up.

  • Report this Comment On June 19, 2009, at 7:24 PM, Wisemansguide wrote:

    The difference between the successful stocks of The Great Depression and today's economic situation is dependent on what is coming in the future; for instance, the stocks discussed here as "winners" were successful ONLY because we happened to win WWII. Had America lost The War, then Krupp, Mitsubishi and Fiat would have been the proper selections for your portfolio.

    Now, here's a relevant market tip for today; Consider the runup to Y2K ten years ago. Cisco and similar networking stocks boomed then because in 1999, thousands of firms around the world suddenly realized that the world's smart guys (including the Clinton administration's "experts") were completely unable to guarantee that the electric & communications grids would not seriously fail - thus causing chaos all over the world. That uncertainty caused a scramble for servers, nodes, networks, camping gear and freeze-dried food that drove the markets into the stratosphere while everyone held their breath on New Year's Eve 1999 - and it's also the reason for the tech crash in March of 2000 - after everyone saw that Y2K never happened.

    Now, Y2K is about to happen again! The Mayan calendar, the Chinese I Ching, the ancient predictions of Nostradamus, the Holy Bible, the Catholic Church's "last Pope", and verifiable astronomical measurements of the upcoming galactic alignment, pole shifts, etc.), all point to December 21, 2012 as being "The End Of The World". Whether you believe it or not is immaterial; the fact is that this new, much larger uncertainty will cause zillions of folks around the planet to catch this idea in the runup to 2012, and they are going to react like Y2K on steroids. Think about it! A word to the wise?

    Go get 'em, Tigers!

  • Report this Comment On June 19, 2009, at 8:59 PM, giantlobster wrote:

    So what stocks would you all recommend for the run-up to the 2012 Mayan end-of-times Prophecy?

  • Report this Comment On June 20, 2009, at 1:14 AM, damianthedude wrote:

    Before all the scare-mongering starts (like Y2K), the Mayan prediction of the end-of-the-world is not literal. The 'old world' ends and a 'new world' begins - it is NOT armageddon !!!

  • Report this Comment On June 20, 2009, at 4:07 PM, raviyama wrote:

    WHILE MR BUFFET IS VERY RIGHT IN HIS APPROACH THAT HE DOESNT INVEST IN TECH STOCKS HE DOSNT UNDERSTAND, I HAVE A FEELING HE ISNT GOING TO GET VERY MUCH OUT OF HIS INVETMENT IN BYD ELECTRONICS OF CHINA EITHER.

  • Report this Comment On June 21, 2009, at 3:21 PM, tomd728 wrote:

    Get long inter-planetary or even better the vehicles

    that can travel to other solar systems.......Indeed

    men.........the end is near !!!!!!!!!!! Pin action off the recs...landing pods,space station builders,bulldogs,

    heavy weaponry and light arms, all terrain vehicles,

    and fortune teller academia.

  • Report this Comment On June 24, 2009, at 9:18 AM, DadSteve wrote:

    Interesting idea wisemanguide. There is already a serious run on hand guns & ammo because of fear that the current admin is anti-gun. I target shoot occasionally and it is almost impossible to find some formerly common ammos already. Common hand guns are generally up in price 20-50% in the past year alone. I know of unemployed people making a living now waiting for the Walmart truck to unload an ammo shipment and then re-selling at market prices. Maybe gun / ammo maker stocks will have a decent run through 2012.

  • Report this Comment On July 16, 2009, at 6:59 PM, markdgls wrote:

    Walk the aisles and see what people are buying. Bulk items such as flour, as one example. My point was, and still is, folks are not buying fancy foods, they are going back to basics. I.e., BREAD, BOOZE, BOWLING.

    I believe GIS and KFT, for two examples, are going to show higher returns through 2010, maybe 2011.

    Also, I'd certainly like to hear from you gurus that I may be wrong..... What say you?

    \

    Mark Douglas

  • Report this Comment On July 22, 2009, at 12:20 PM, jenjohn26 wrote:

    Interesting article but let's dig a little deeper with verifiable numbers. I'll use the S&P 500 (dividend adjusted), the Long Treasury rates, and the AAA Corp Bond rates. Links to the data can be found below.

    In January of 1932, the S&P was at 8.3, the long treasury rate was 4.26%, and the AAA Corp Bond rate was 5.2%. Assuming you invested in the S&P or simply locked in those rates, what would your returns have been?

    By the end of 1934, the S&P was at 9.26. At the end of 1944, 1949, and 1954, the S&P was at 13.1, 16.54, and 34.97. Your unanualized returns for the three investment are as follows: (in order S&P, Treasury, AAA Corp)

    1934 11.57% 13.33% 16.43%

    1939 49.04% 39.62% 50.01%

    1944 57.83% 72.00% 93.29%

    1949 99.28% 111.89% 149.05%

    1954 221.33% 161.04% 220.89%

    Clearly, you would have been better off to invest in a 20-year treasury (with little risk) than in the S&P and only investing in stocks in 1952 or so.

    It would be nice to have articles that aren't so deceptive.

    S&P Values

    http://www.econ.yale.edu/~shiller/data.htm

    Long Treasury Rates

    http://research.stlouisfed.org/fred2/series/LTGOVTBD/downloa...

    AAA Bond Rates

    http://research.stlouisfed.org/fred2/series/AAA?cid=119

  • Report this Comment On July 25, 2009, at 2:13 AM, max12345 wrote:

    I think that probably a better approach to the one you have implicitly adopted above might be to look at the sectors and industries that beat the other sectors and industries of the depression era (at that time) (and why they did so) and the sectors and industries that will be most likely to beat the averages in today's era.

    That is, doing the preceding rather than trying to find equivalent companies today to yesterday's outperforming companies. Such as when saying that "Bulova watch's modern-day equivalent (or its analogous company) might be Apple" ...or that today's Cisco might be yesterday's Electric Boat.

    Let's first figure out first why the sectors and industries that did so well most probably did so in that era, and then try to identify "analogous" sectors and industries today.

    Only after that is done can one then meaningfully further dig down to trying to pick individual companies and stocks within those "right sectors" (as a second step)

    But the main lesson that I think can and should be drawn from your very useful depression era list of super-outperformers.... is not the story (or not only the specific story) of the individual outperforming companies but the stories and trajectories of the sectors they were in. (at least this is my own point of view)

    Taking Defense (that is War) out of the equation for a moment (since the list of depression era defense stocks that outperformed, or did not perform all happened in the context of a World War) ....and although there may well be a third world war -or if not that- a continuing series of "lesser wars"..."defense" overall (that is preparing for wars) is probably (though not definitely so) more likely to be a somewhat shrinking sector going forward rather than a perpetually growing one.

    This because the world as a whole is finally (very) slowly figuring out that preparing for wars and engaging in wars is (overall) a losing proposition for overall humanity at large....(the realities of so called "globalization" may finally be sinking in?) ...and that it's much better to spend hard earned national incomes and resources on things like health and education and also spend more energy and time in creating international institutions for authentic dialogue (one in which everyone also actually listens) that can make "the need for war" less and less...rather than everyone being constantly prepared for war and on being on some kind of a war footing or another.

    What were the sectors and macro trends that your depression era list of outperforming companies points to?

    Let me try to have a quick crack at this:

    The paper companies: Writing and written communications of all types were obviously going to

    dramatically increase going forward and paper was the main tool needed to write. What is the equivalent of paper today? Probably the computer screen.

    The coal and hydroelectric power companies: (and I was surprised that some oil companies didn't also make it on that list)....Obviously the answer here is that Energy needs would be going up dramatically going forward. What might be the equivalent today? Probably still oil companies since the world is running out of oil, but also various kinds of alternative energy companies. (both producers, distributors, smart grids and etc. etc.) (though it will be difficult to guess alternative energy winning sectors and winning companies within those sectors)

    Zenith radio which then produced basic radios and televisions: Radios and televisions were the growing means for communicating both with citizens as well as with consumers during that period. They are still very important today but other media, namely computers and internet also have entered the scene and have either replaced or significantly supplanted them. So the latter are the obvious current sectors likely to outperform. (as well as those companies who will be able to leverage or dramatically improve in some truly innovative ways the pre-existing radio and television industries and companies; and in this category one could probably fit cable television as well as broadband and everything related?

    Container corporation of America probably represents the following "sector": "improving transportation, modularizing shipping and laying the groundwork for multi modal transport".....what will be the main means of transporting goods and services in the future and making those processes efficient? (the answer is obvious) The kinds of goods and services being transported is also likely to be less and less tangible and concrete physical goods or services and more and more "information" -related intangible goods and services. (hence the importance of the so called "information super-highway" sector and all of its sub-sectors and industries)

    Spicer manufacturing and its own sector "auto parts"....probably did so well (and better than any auto company) because it probably supplied parts to ALL automobile manufacturers. And today companies such as Seagate Technology -which makes hard drives for many computer companies- might be a modern day analog. But the better question to ask is: what companies or industries are likely to be the major suppliers to all of the "personal and intellectual mobility sectors" of the future....(rather than focusing only on cars then, or on computers and internet now) That is, the key aspect now may be supplying "enhancing personal mobility"...in both the physical and intellectual senses.... in the world to come.

    As far as the comment on banks and banking which you also made, here I would go back to something I believe is always crucial to keep in mind:

    What do ALL companies (in every sector and industry) need to start up, develop and then become successful and sustain themselves over time?

    All of them need four things basically: 1) Human Creativity (to invent products and services, set up companies, and bring those products to market) 2) Materials (out of which to make those products and services even if these are now smaller and smaller and less and less materials-intensive; though things such as "rare earths" will become more and more needed) 3) Energy (to power those products and services and to power mobility of all types as well as heating and cooling) (which are NOT going to go away) and 4) Money to finance both capex, opex and any other company "development work" (with "development work" taken broadly)

    So if one concentrates one's investment on those companies which provide all other companies one or more of the above four indispensable ingredients (creativity, materials, energy and money) one can avoid having to "guess" (or guess as much) which specific companies in the vast array of sectors and industries that exist, are going to do well or not going forward.

    Which is why I have bought a fair bit of oil and gas and alternative energy companies, a fair bit of commodities and industrial metals and junior miners, a few large banking institutions that had been severely beaten down (but were clearly not going to go bust) and also few companies that display what I would call "authentic human creativity and innovation". (such as research in motion)

    I also have focused (given the specific context of this particular historical moment) also on some rather average and maybe even not so great companies that: a) have been severely beaten down; b) I have reason to believe they will live to fight another day and can rebound significantly in the short to medium term ...and c) preferably also pay me some dividend while I am waiting (but these with a clearly defined exit point)

    Using the above criteria (and trading in and out only just a little) I am up over 50% overall from mid December.

    If I can keep up my own batting average (and it's a big if since "big rallies" don't necessarily come every other week) ....for just about another six months or a year I probably will then sell about half of my portfolio and put it into something more tangible like property. (whose zeroes and ones are a bit less likely to disappear from one day to the next, if judiciously chosen that is)

    I hope the above got a few neurons firing here and there around virtual (or real) space and might turn out to be of some minor help to just a few others too. (and particularly "fools")

  • Report this Comment On January 16, 2010, at 8:48 PM, walt373 wrote:

    @jenjohn26:

    I don't think your calculations are correct, at least for the S&P500. The S&P prices in the Excel spreadsheet are not dividend adjusted. You need add dividends received and the also the returns from their reinvestment.

    For example, you can calculate the annualized rate of return from 1901 to 2001 to be 5.4%, which is way too low. If this was the total return for the stock market over a hundred year period, you might as well not invest in stocks at all.

    according to the spreadsheet...

    S&P500 at 1901: 7.07

    S&P500 at 2001: 1335.63

    10^(log(1335.63/7.07)/100) = 1.0538

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