Is the economy headed into trouble? Things seem solid enough right now, with new weekly unemployment claims just hitting their lowest levels since COVID-19 took hold a year ago, and Q1’s GDP growth rate of 6.4%. But never say never. The snapback thus far from the pandemic’s initial disruption was apt to happen with or without help. Matters could get tougher from here, as the true strength of the turnaround is tested. Don’t forget, April’s unemployment rate of 6.1% actually edged up a bit from March’s level.
With that as the backdrop, it wouldn’t be crazy to go ahead put a few recession-proof picks in your back pocket, just to have them handy in case of a rainy day. Here’s three of the best to consider.
Did you know that not once since going public back in 1991 has AutoZone‘s (NYSE:AZO) full-year revenue fallen from the previous year’s total? Not. Once.
Granted, the same can’t quite be said of earnings, and its pace of earnings and sales growth isn’t entirely consistent. Still, this company is incredibly resilient. Even with last year’s pandemic-prompted overhang, AutoZone’s net income of $1.87 billion for the four-quarter stretch ending in mid-February was up 15% from the year-earlier comparison of $1.62 billion, supported by similar sales growth during that stretch. It’s a testament to just how committed consumers are to keeping their vehicles running and looking good.
And well they should be.
See, cars are a bigger investment for the average consumer than they’ve ever been before, with Kelley Blue Book indicating early this year the average sales price for a new vehicle purchased in the U.S. now stands at a near-record of just under $41,000.
Fortunately cars are lasting longer. The average car driven on U.S. roads is a record-breaking 11.9 years old, according to the Bureau of Transportation Statistics. But to keep their cars in good condition and protect their expensive investment, consumers must spend a little more on an ongoing basis than they might have in the past. To this end, Value Penguin reports that on a per-mile-driven basis, auto maintenance and repair spending in 2020 was up 124% from 2019’s levels, with washing and detailing accounting for a big piece of that growth.
The dynamic, of course, bodes well for AutoZone regardless of the environment.
It doesn’t take a brain surgeon to figure out that Colgate-Palmolive (NYSE:CL) is the name behind Colgate toothpaste and Palmolive dishwashing liquid. What’s not so obvious is that this is the same company behind Speed Stick deodorant, Murphy Oil Soap, Ajax, and several other brands of household consumables.
It’s no Procter & Gamble. It’s not even a Unilever, clocking in about half the size of Unilever’s market cap, and one-fourth of P&G’s. Colgate-Palmolive’s small size, however, may ultimately work to its advantage by allowing it to adapt more quickly to a changing marketplace than its bigger competitors can.
Take the consumer goods industry’s current inflation woes as an example. All the key names in the business are facing higher input costs, including Procter & Gamble, which promised product price increases in the foreseeable future. Colgate-Palmolive has already put price hikes in place, successfully so. Despite last quarter’s average price increase of 4.5%, organic sales improved 5% while overall sales grew 6%. The company still intends to cut costs where it can, however, in order to remain competitive without crimping margin.
Colgate-Palmolive’s top and bottom lines don’t grow as consistently as AutoZone’s do, but it’s still certainly a smart holding for times when investors need to play a little defense.
3. Dollar General
Finally, add Dollar General (NYSE:DG) to your list of recession-proof stocks to buy if you’re worried the future might be economically grim.
Dollar General operates 17,426 discounted general merchandise stores under the same name in 46 different states. If you’ve heard of the company but never seen one of its stores, there’s a reason. That is, most of its locales are found in communities with populations of less than 20,000. There’s a method to the madness, though. By focusing on smaller markets with smaller stores, Dollar General sidesteps direct competition with the likes of Walmart, which has to set up shop in larger communities to support its bigger stores.
That’s not the only key point of differentiation between Dollar General and similar retailers either, or even the most important one.
While it’s not clear if this is the design of its lower-priced goods or just sheer chance, Dollar General’s typical customer reportedly lives in a home with an annual household income of between $40,000 and $50,000. For comparison, consumer research company Kantar estimates Walmart’s average customer has a household income nearer $76,000, while Target‘s typical shoppers have average annual earnings between $10,000 and $20,000 more than that.
These socioeconomic distinctions, however, are breaking down. Just a few years ago, market researcher NPD found nearly 30% of the millennials shopping at Dollar General were earning in excess of $100,000 per year. That report echoes similar findings from Nielsen, which first began tracking this paradigm shift in 2012. In a similar vein, in 2018 the National Retail Federation reported that 89% of U.S. adults were now regular shoppers at discount stores regardless of their income. Numbers crunched by Thinknum Media in 2019 suggest that while most discount stores are located in less affluent areas, more and more are opening up near homes with annual incomes between $50,000 and $75,000.
Simply put, consumers are decreasingly concerned about where they shop, and increasingly concerned with the value they get. If the economy hits a wall soon, don’t be surprised if Dollar General derives some added benefit.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.