Fears of recession have many investors cowering in the corner. But if you're thinking about making a move toward buying defensive stocks, think again -- you don't want to be left holding the bag when the recovery comes and those stocks go out of favor.
Successful investors have to stay one step ahead of conventional thinking. What that means right now is that while many are preparing for a financial meltdown, you have to look forward. Your investing decisions have to anticipate the eventual recovery.
Profiting from the business cycle
Historically, the economy's growth has followed cycles of expansion and recession. In the stock market, many see certain sectors as being particularly attractive at specific times in the business cycle.
So for instance, when an economic expansion slows down and a recession appears imminent, many investors flock to stocks they think are recession-proof -- stocks in industries like health care and consumer staples, whose businesses sell necessities and therefore hold up better in an economic downturn.
These defensive stocks make sense -- if you buy them before everyone starts thinking about a recession. But after months of anticipating the slowdown, many defensive stocks have gotten a lot more expensive. Take a look at some popular defensive plays and how they've performed over the past three months:
|
Company |
3-Month Return |
|---|---|
|
Hershey (NYSE: HSY) |
10.3% |
|
Wyeth (NYSE: WYE) |
13.5% |
|
Kohl's (NYSE: KSS) |
13.7% |
|
Johnson & Johnson (NYSE: JNJ) |
7.9% |
Sure, companies that sell basic necessities can count on a steady flow of sales even if a recession comes. That could help keep their stock prices up. But if you're thinking about buying them now, you'll pay a premium price for that protection -- without any guarantees that it'll actually work.
Fight the next war
Instead of worrying about an imminent recession that may never actually come to pass, remember your long-term investing focus. For instance, recession fears haven't been kind in recent months to retailers, especially ones like electronics seller Best Buy (NYSE: BBY), which relies heavily on selling big-ticket items. Once the economy improves, though, consumers will start buying big-ticket items again, and retailers should see their lot improve. By investing now and beating the crowd, you can buy in at an attractive price. Then you'll profit when waves of other investors discover the next trend.
Similarly, homebuilders like Pulte Homes (NYSE: PHM) and Centex (NYSE: CTX) are suffering from huge inventories and slow demand. But the housing market will eventually bottom out, and investors who are early to the party will reap a lot more of the benefits.
Being a smart investor means staying ahead of the crowd. With many still fearful of economic problems down the road, an astute long-term investor can find bargains in the sectors that will do best once the economy gets back on track.
For more on investing in a recession, read about:
- Why you shouldn't care about a recession.
- How to protect yourself if the economy is worse than you think.
- Fund managers who are profiting from the panic.
Best Buy is a recommendation of Motley Fool Stock Advisor. This investing newsletter focuses on long-term stock ideas that will do well through recessions and recoveries alike. Find out more with a free 30-day trial.
Fool contributor Dan Caplinger always tries to beat the crowd. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of Best Buy, which is also an Inside Value recommendation. Johnson & Johnson is an Income Investor pick. The Fool's disclosure policy jumped off the bandwagon a long time ago.
