If you want to recession-proof your portfolio, the best companies to own are those with rapid growth that's not related to higher employment or other favorable economic conditions. Instead, it should be related to offering a fundamentally superior value proposition for customers.
The much more attractive offering will result in rapid customer adoption and large market-share gains, such that growth is almost assured, even if the overall economic pie is shrinking due to a recession. Three companies that meet this criteria are Amazon (AMZN 3.09%), Peloton (PTON 4.79%), and Chewy (CHWY 3.89%).
The e-commerce gorilla
Amazon's sales growth could certainly slow during a downturn, but the company is arguably recessision-resistant over the long haul simply because the growth of e-commerce is still in its early innings. According to the U.S. Census, e-commerce was responsible for an 11.5% share of total retail sales in the U.S. in the first quarter of 2020.
In a decade or two, e-commerce is likely to have a much greater share of retail sales. Much of those gains will be driven by Amazon and its key initiatives. For example, last year, Amazon changed the shipping perk that comes with Prime from free two-day shipping to free one-day shipping for millions of items.
Eventually, Amazon is likely to have all items available for free one-day shipping. And further down the road, it's a good bet that Amazon expands its logistics and delivery capabilities to include free same-day shipping for virtually all items. That makes continued market-share gains virtually inevitable.
Image source: Amazon.
In the COVID-19 recession that's been driven by social distancing and people remaining housebound, Amazon is clearly thriving as more people order online rather than risk their health at physical retail stores. But even in a typical recession when overall retail sales could decline, Amazon would almost certainly continue to grow its e-commerce net sales because it's constantly taking market share from its offline competitors. The overall pie might be stagnant or shrink, but Amazon's share of the pie would still increase.
In addition, in an environment of consumer belt-tightening, consumers tend to increasingly flock to the retailers that offer the best value propositions. Amazon boasts Prime free shipping, a wide selection of goods, and always-competitive prices. It's a must-have value proposition for many people.
Finally, Amazon Web Services (AWS), the company's rapidly growing public cloud business is mission-critical once it's entrenched in a company's workflow. That dynamic is unlikely to change in a recession, especially when AWS is taking so much share from on-premise technology solutions.
The home-fitness pioneer
Peloton is another unconventional pick for a recession-proof stock, but consider this: The Peloton bike can be purchased for $58 per month for 39 months at 0% interest. Including the monthly subscription of $39 per month, the total cost over the first 39 months is $97 per month. If two people in the household regularly use it -- and up to five household members can have their own profile -- that's $48.50 per person per month. And when the bike itself is paid off, the subscription cost split two ways drives the monthly cost down to $19.50 per person per month.
That's an attractive value proposition. According to Peloton, the average gym membership in the U.S. is $58 per month per person or $116 for a couple. And in many cities, the cost of one spin class can be $30 to $40 per class.
These fitness routines require you to get in the car, drive there, park, get sweaty with a bunch of other sweaty people who could have COVID-19, and then drive home. It's very easy not to go to the gym when it's such an effort and inconvenience. In fact, some would argue inactive members is what drives Planet Fitness's business model.
In contrast, Peloton subscribers get to take fun and engaging live spinning classes from some of the world's best instructors from the comfort of their own homes. And there are few excuses not to ride when you walk by your Peloton bike each day. As a result, Peloton subscribers are incredibly engaged. Last quarter, subscribers averaged an incredible 17.7 Peloton workouts per month, which was up from 13.9 workouts in the prior-year's quarter.
In addition, average net monthly churn is well below 1% and even fell below 0.5% last quarter. The large sunk cost of the bike itself surely acts as a churn reducer. After all, if you've already spent $2,245 on an exercise bike, you're likely to continue paying the $39 monthly fee required to access the content.
Finally, with only about 1 million Connected Fitness subscribers, Peloton has a long runway ahead. This organic-demand growth is driven by the high praise Peloton subscribers have for the product and loads of free word-of-mouth marketing.
As a result, Peloton's growth is not driven by or reliant on discretionary spending growing or macroeconomic conditions improving -- it's driven by continued market-share gains as more people discover its revolutionary product and become addicted to it. And these days, more and more people are discovering Peloton than ever before due to COVID-19. That's why Peloton appears recession-proof.
The online pet specialist
Chewy appears to be the largest online retailer of pet food and supplies in the U.S. The beauty of the pet category, especially food, which is the majority of Chewy's business, is that pet owners aren't going to cut back on food for their furry friends in a recession. Pet food is simply not a discretionary purchase.
Chewy should continue to gain share from physical retailers because they can't match Chewy's combination of wide selection, fast shipping directly to your home, and low prices. The company's e-commerce model also benefits due to the big advantage customers derive from not having to buy and carry heavy dog food bags or bulky boxes of cat litter. It's so much easier to buy those things online, especially when Chewy offers unbeatable prices.
In a similar way to Amazon, which continues to grow in recessions due to its share gains in a more stagnant overall retail market, and Peloton, with its rapidly growing share of the home fitness industry, Chewy appears to be gaining share within the pet food and supplies market. In each case, whether the end markets themselves are growing isn't critical to the company's growth -- it's the relentless share gains that drive it. That's why investors should consider these three stocks as recession-proof.
