With major indexes falling off a cliff recently it is an opportune time to discuss investing in solid companies that have either become cheap or where the underlying businesses possess characteristics that make them relatively immune to market forces. Below, Fool contributing analysts discuss what makes Dollar Tree (DLTR 4.38%), Disney (DIS), and Wal-Mart Stores (WMT -1.61%) top stocks to weather the storm.
(Looking for the top 5 defensive stock picks? Check this out.)
Rich Duprey: At the risk of sounding like it's wishing for bad things to happen to good people, a market crash is a friend to Dollar Tree.
The dollar store chain really came into its own during the Great Recession as consumers were forced to count their pennies and go down market. Its simple pricing strategy of "everything for $1.00" made budgeting a no-brainer for consumers.
Although the economy is supposedly in recovery, Dollar Tree thrives because consumers have, to a large extent, not traded back up.
Unlike rivals Dollar General and Family Dollar, which offer multiple, higher price points and whose target demographic is the low-income consumer, Dollar Tree's demo is the middle income customer who's been hard-pressed to find her footing in the recession's aftermath.
That's partially due to the recovery tilting toward those who were better off to begin with, but also because the deep discounter has invested in making its store more valuable to its customers.
More brand name goods have been added, and more consumable goods, too, with Dollar Tree adding refrigerators and freezers to thousands of its stores. Although consumables tend to be lower margin items, they serve to increase traffic and allow it to make up in volume what it loses in profit.
Even though consumables chip away at Dollar Tree's margins, it remains the most profitable of all three major dollar stores, turning every dollar of revenue into $0.12 worth of operating profit. Dollar General makes less than a dime on each dollar generated, while Family Dollar earns just a nickel.
A market crash would signal a new recession is upon us, and while that would be bad for all of us, for Dollar Tree it would be akin to making lemonade after being handed lemons.
Tim Beyers: For ships navigating choppy waters, nothing is so important as ballast. Add enough targeted weight and you stabilize the vessel. So it is with businesses capable of weathering stormy markets; they're well-diversified enough that no single unit -- no matter how it underperforms in the short term -- can sink the enterprise.
Disney is that sort of operation. The House of Mouse is composed of seven business units covering various forms of entertainment. Cable Networks account for nearly a third of revenue and 60% of operating profit, mostly thanks to the success of its high-rated sports network: ESPN. A global network of Parks and Resorts also add meaningfully to the top line, and is the second-largest profit contributor. But its the Consumer Products group that acts as ballast for both -- and the remaining units -- by bringing in high-margin licensing and merchandising revenue tied to owned Disney imprints. Items based on Frozen and Guardians of the Galaxy have been particularly hot sellers.
That's why I believe discount retailers Wal-Mart Stores is a good investment for recessions and other market drops.
I'm not just jumping on a common-sense conclusion here. You might recall the last recession, the subprime mortgage disaster that destroyed the stock market in 2008. The S&P 500 market index fell as much as 50% in a matter of months -- and Wal-Mart headed in the opposite direction:
It's true that even Wal-Mart's sales growth took a breather during this crisis. Consumers weren't exactly splurging in the big-box retailer's pricier aisles, but digging for deep-discount bargains above all. That's what happens when job security and stable salaries become rare luxuries.
Still, the company navigated through the storm with all sails intact. Meanwhile, other large retailers would have sold their grandmothers for a taste of Wal-Mart's stable operations. J.C. Penney's trailing sales plunged 11% lower between 2007 and 2010, while Wal-Mart's revenue rose by 16%.
And on top of the recession-proof business model, Wal-Mart also pays a reasonable dividend -- and if share prices start flagging, the yields only improve.
You've already seen the rock-steady stock chart for the same period. If you want a safe haven in the next storm, you should look at low-cost retailers like Wal-Mart that have a stable business and a good dividend.