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3 Stocks That Would Benefit From a Recession

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If the economy slows down again, these companies will be good places to have parked your money.

While worries of another recession have cooled off in the last month, the prospect of the economy lurching to a halt remains a reasonable fear seven years into the bull market.

The S&P 500 has recovered from its February nadir, but it's still down over the past year and 5% off its all-time high last May. Economic history also tells us that major indicators like the unemployment rate tend to move cyclically, so as it descends below 5%, the prospect of an economic slowdown increases. With that in mind, it's always good to have few stocks in one's portfolio that can be expected to thrive during a recession. We asked of our contributors to select a few. 

Brian Feroldi: One company that is poised to benefit if the economy was to grind to a halt is PRA Group (PRAA 0.70%), a global financial company that specializes in debt collection.

The company's business model is to purchase charged-off consumer debt from financial institutions for pennies on the dollar; it then contacts the debtors directly and attempts to collect. This has proven to be a winning formula for a long time; the company's revenue has been growing at double-digit rates for years. The 2008 recession provided the company with ample opportunities to purchase charged-off debt at favorable prices, and PRA Group's management team has proven itself to be adept at spotting bargains.

However, buying new charged-off debt at attractive prices in today's markets is proving itself to be a challenge, owing to the fact that several large financial institutions have decided to stop selling it on the secondary markets, which has greatly decreased the supply. The default rate in the U.S. is also very low right now, which has further reduced supply. Add those two factors together and it's clear why the company was forced to dial back its near-term growth expectations, which caused the company's stock to plunge.

In order to help offset its stagnant U.S. business, the company is expanding rapidly into international markets. It's also buying back huge amounts of stock, which is probably a smart move since the company is still profitable and its shares are down more than 60% from their 52-week high. PRA Group is also positioned for continued to growth once the supply of charged-off debt picks back up, which should happen in the next recession. However, until that occurs, the company's growth is likely to remain modest.

Daniel B. Kline: When times get tough people look for affordable luxuries -- things that make them feel good without breaking the bank. In a recession, people also tend to start questioning some of their expenses, and anyone looking to cut back will take note of the $4 to $6 drinks and $3 to $4 pastries sold by the leading coffeehouse chain.

Dunkin' Brands(DNKN) has some pricey offerings, but it also sells, as its name suggests, doughnuts -- delicious, indulgent treats which cost less than a dollar in most cases. It's actually possible to buy a doughnut and a cup of coffee for under $3 at the chain's more than 8,000 locations across 41 states.

In a recession, Dunkin' Donuts is a treat you can pay for with the change scrounged up from your dashboard. The company also extends that value model with its many combination deals, and the fact that around $12 scores you a dozen doughnuts give you a thrifty way to be a hero to your office.

Dunkin' Donuts is a working class brand that has always been a lower-cost alternative to its higher-end, fancy-pants rivals. That will serve the company well in tough times as regulars will keep visiting and people who can no longer justify spending $7 or $8 for a latte and a muffin will make the switch.

Jeremy Bowman: Groupon Inc. (GRPN -0.87%) is almost by definition designed to thrive during recessions. The daily deals website connects buyers looking to save a few bucks with merchants who are offering discounts because they have a new product or service, want additional exposure, or are just looking to get a few more bodies through the door.

The company in fact got its start during the financial crisis, launching in November 2008. It spread like wildfire, gathering 20 million members in less than two years, demonstrating that it was the perfect platform for the era. Businesses were desperate for traffic in the face of an unprecedented economic malaise, and they swarmed Groupon, offering deals that were quickly snapped by penny-pinching consumers.

The company went public just three years after its launch, but has struggled ever since, as the industry commoditized and the demand for deals abated. The stock has been mired under $5 for several months.The business model did not live up to its original promise, but a recession could be one of the best opportunities for Groupon to bounce back. 

 

The son of PRA Group's CEO is currently employed by The Motley Fool. Brian Feroldi owns shares of PRA Group. Daniel Kline has no position in any stocks mentioned. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PRA Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Groupon, Inc. Stock Quote
Groupon, Inc.
GRPN
$9.11 (-0.87%) $0.08
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.
DNKN
PRA Group, Inc. Stock Quote
PRA Group, Inc.
PRAA
$33.03 (0.70%) $0.23

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