According to a Bloomberg survey, 30% of polled economists believe the U.S. could enter a recession within the next 12 months. And with the inflation rate hitting 8.6% in May, consumers are under huge pressure to make ends meet.
In times like these, investors should bet on companies built to thrive in an economic downturn. Let's explore why Dollar General (DG -1.36%) and Vector Group (VGR 1.56%) fit the bill.
1. Dollar General
With its shares up 5% in 2022, Dollar General is outperforming the S&P 500, which has fallen 18% in the same period. The discount retailer can maintain its bull run through expanding store count and a compelling strategy to tackle supply chain challenges and inflation.
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Dollar General operates discount grocery stores targeted at low-income consumers. It keeps prices low through a no-frills shopping experience, private label brands, and by locating its stores in areas with cheaper real estate and labor costs. Unlike the typical retailer, Dollar General can benefit from inflation because consumers who would have typically shopped at places like Walmart or Target turn to dollar stores in search of lower-priced goods. The company is also exploring cost-saving methods like self-checkout and increasing its truck fleet for better logistics.
First-quarter net sales rose 4.2% year over year to $8.8 billion as Dollar General continues to open new stores (it has a total of 18,356). And despite the challenging macroeconomic climate, management expects top-line growth of 10% to 10.5% for 2022, as well as an earnings-per-share increase of 12% to 14% -- to $11.6 at the high end.
Trading for $248 per share, Dollar General boasts a forward price-to-earnings multiple of 21, which is just slightly higher than the market average of 20. The company returns value to shareholders through a dividend (the yield is 0.9%) and a share buyback program that retired $747 million worth of common stock in the first quarter alone.
2. Vector Group
Vector Group is a cigarette maker that focuses on the discount market through brands like Eve, Grand Prix, and Liggett Select. Like Dollar General, it can thrive in a high-inflation environment because it is an alternative to higher-priced rivals.
Many investors consider tobacco a recession-proof industry because its products are habit forming. Many consumers will continue smoking, even in bad economic conditions. And so far, Vector Group's stock is outperforming the market -- down just 3% year to date compared with the S&P 500's decline of 18% over the period.
Business operations are also stable, with first-quarter revenue growing 15% year over year to $312 million despite the spinoff of former real estate subsidiary Douglas Elliman, completed in December. But despite its perks, the tobacco industry isn't without its risks -- namely, regulation.
According to The Wall Street Journal, the Biden administration is considering a plan to reduce nicotine content in cigarettes. And while it this unclear when (or if) these changes could come into effect, they could drastically harm Vector Group's business model. That said, the stock compensates investors for this uncertainty with a massive dividend yield of 7.4% and a modest P/E ratio of 10 -- just half the S&P 500's multiple.
Which company is best for you?
While Dollar General and Vector Group are both great stocks to hedge against a bad economy, they serve different investment strategies. Dollar General seems like the safer bet because of its relatively mainstream business model. The threat of tobacco industry regulation makes Vector Group's future less certain. But its massive dividend could give it a place in an income investor's portfolio.
