When the economy tanked in 2008, there was a lot of talk about the benefits of investing in companies that would flourish when consumers traded down to lower-cost goods. Assuming you still remember Econ 101, inferior goods are the kinds of products that people are more likely to start buying (or buy more of) as they find themselves tightening their belts or padlocking their wallets.
I bet you'll find this trend toward inferior goods in your own recent spending habits. Lately, your kitchen probably has fewer steaks in the freezer and a surprisingly high stack of ramen noodles in the pantry. In fact, a recent Harris Interactive poll found that two-thirds of Americans are buying more generic brands, while almost half are brown-bagging their lunch. In other words, they're giving up a few of the little things to save money. That's why it's worth emphasizing that identifying which goods are inferior can help you take advantage of a down economy.
Today, I'm sharing three such stocks from Motley Fool analysts.
1. The reigning king
When it comes to trading a minor decrease in quality for a major decrease in price, the first store on most people's minds is obviously Wal-Mart
Wal-Mart is a Motley Fool Inside Value recommendation, and Inside Value analyst Joe Magyer says, "Wal-Mart's scale, experience, logistical smarts, and a brand practically synonymous with value combine to give the company a serious competitive advantage, even in a world as cutthroat as retail."
2. "Just Plane Smart"
One of the first things people cut back on in tough times is recreational travel. Although travel certainly doesn't grind to a halt, flying has become more of an occasional necessity than an affordable luxury.
That's the driving idea behind Southwest Airlines
3. Buy American (beer)
The worse things get, the more people turn to simple vices for comfort. This may be why mass-market beer is considered an inferior good. Boston Beer
Writing in Stock Advisor, David Gardner says Boston Beer "created its industry and has plenty of room to grow as it leads 'better beer' to a growing share of the market." And you can expect a certain amount of consistency because "its innovative founder remains involved and is a major owner."
These three stocks could all benefit from a prolonged period of belt-tightening. Investing in companies that make quality "inferior" goods is one strategy for riding out a down economy. Think of the brands you've been switching to to save a few bucks, and see whether other people are doing the same. Who knows? You may even be able to afford a few more steaks.