Weighing risk and potential reward is a fundamental part of investing. But what is seldom talked about is the psychological side of investing, which becomes much more important during a bear market.
Two stocks that both return 100% in five years might generate the same net result. But if Stock A was up 400% and down as much as 75% at one point while Stock B more or less produced steady gains with less volatility, chances are the vast majority of investors would much rather take Stock B. For most of us, lower volatility means less stress. And many investors routinely accept lower returns for a lower amount of risk because they value reliability over growth.
Over the past five years, Apple (AAPL -0.35%) and Procter & Gamble (PG -0.78%) have both beaten the S&P 500 -- all with relatively low volatility and reasonable drawdowns. And while no one knows if either stock could fall further, there's reason to believe that both companies should continue to be long-term winners. Here's why.
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Apple's margin expansion is the real deal
Apple has continued to prove its ability to grow product and services sales while also growing its margins. For the six months ended March 28, Apple generated about $221 billion in sales with $181.9 billion coming from products and $39.7 billion from services. This means that Apple generated more services sales in the last six months than its total sales in 2018.
But here's the real kicker. For the first two quarters of fiscal 2022, Apple earned a gross margin of 38% on its products (which is fantastic) and a staggering 72% gross margin from services. You would be hard-pressed to find a stand-alone company generating such results -- let alone a business unit of the most powerful tech company in the world.
Add it all up, and Apple gives investors a growing top line and converts more revenue into actual profit thanks to margin expansion. Its sales would certainly slow during a recession as cost-conscious customers delay major purchases like upgrading phones and computers. But the company's services keep customers engaged over time while presenting a revenue stream that doesn't rely solely on product upgrades.
P&G has some major advantages when times get tough
Procter & Gamble is the quintessential recession-resistant stock. Yet even P&G isn't immune to the headwinds of inflation. Last week, disappointing earnings from Target and Walmart had ripple effects throughout the consumer staples sector. In fact, the sector suffered its worst two-day performance in over 20 years. P&G stock traded down in sympathy. But there's reason to believe the business is handling inflation much better than other food-and-beverage or consumer-products companies.
For starters, P&G relies far less on discretionary income than other consumer-staples companies. During a recession, consumers tend to delay big-ticket purchases like homes, cars, luxury goods, and the like. Next comes discretionary spending on vacations, expensive clothes, going out to eat, and more. Also included would be discretionary spending on home goods, appliances, and anything else that doesn't need an upgrade.
But consumers are unlikely to cut spending as much for products like toothpaste, toilet paper, dish soap, laundry detergent, and many of the other products that P&G sells.
What's more, the company generates gobs of free cash flow to support dividend raises and share buybacks. All told, you have a company that should do well even as consumer spending falls.
Two compelling buys now
Apple and Procter & Gamble are two completely different companies, but as investments, they are similar. Both pay dividends, with Apple stock yielding just 0.7% compared to 2.6% for P&G. But don't let Apple's low yield fool you. It has bought back a jaw-dropping amount of its own stock over the last decade, reducing its outstanding-share count by 38% compared to 13% for P&G.
Apple and P&G have the staying power and the leadership needed to grow for a long time to come. That makes both stocks low-stress holdings for investors of all ages and risk tolerances.
