Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

The Kind Of Stock That Can Buck A Recession?

Published 12/21/2014, 05:59 PM
Updated 07/09/2023, 06:31 AM

It is quite certain that investors who saw the value of their portfolios dip during the last recession would be looking for ways to protect their portfolio in case such event arises in future. And now is the time to look for ways to fortify your portfolio. However, beyond looking out for dividend champions and capital efficient companies, you should be on the lookout for companies that have an impressive track record of providing long-lasting value.

Here’s is what I mean. I recently read a press release published earlier this year by Lane End Conference Center, a 26-acre conference facility based out of the UK, in which the company claimed it has been able to buck recession. The most interesting part is where the company talked about the strategy it used to buck recession. The company said, instead of cutting costs, it kept reinvesting its profits into the venue’s facilities to ensure high-quality service delivery.

This made me research to find out if there were companies that employed this strategy that could hurt cost reductions in a tight economy to buck the recession. Impressively, there are many of such companies out there. And I believe that some of these companies still offer an attractive investment proposition considering that they are dedicated to delivering value always. We’ll consider Amazon (NASDAQ:AMZN) as an example.

Amazon.com, Inc.

It’s easy to say that Amazon was able to buck the recession mainly because the recession helped ecommerce, as consumers took to the internet to help them save more money. While that sounds right, one needs to understand that Amazon did take some steps that helped it excel amongst its competitors.

While other companies were setting their focus on regimes that would help them save costs, Amazon embarked on ventures that would create long-lasting value. For instance, Amazon saw its cost of sales rise from $14.896 billion in 2008 to about $19 billion dollars in 2009. By way of comparison, eBay (NASDAQ:EBAY) saw its cost of sales rise from $2.228 billion in 2008 to $2.479 billion in 2009, an 11% increase compared with Amazon’s 27.4% increase during the same period. In addition, Amazon’s total operating expenses increased by 28.4% during the same period, while that of eBay increased by 13%. This is just to show that Amazon wasn’t overly focused on cost reduction. This is somewhat counterintuitive since the investment community thinks a company that would do well in recession should be effective at cutting costs.

What Amazon did was to lower the cost of shipping, which must have put some pressure on margins. Amazon knew that this tweak would encourage online shoppers to consider its platform over the long-term. It was also around this period that the company decided to release Kindle 3 to improve people’s increasing appetite of reading books digitally, in the end helping people save costs over the long term since digital books cost less than paperback versions. Note that none of these initiatives would help companies save costs. However, its focus on the long-term helped it grow through the recession to greater heights. For instance, Amazon’s gross profit rose from $4.270 billion in 2008 to $5.531 billion in 2009, while that of eBay decreased from $6.313 billion in 2008 to $6.248 billion in 2009. More impressively, Amazon’s gross profit, which was lower than that of eBay up until 2010 is now about 85% higher than that of eBay.

The most impressive thing here is that Amazon was able to buck recession without focusing on cost savings. It did by focusing on value delivery.

Final words

One truth about doing business investors need to be aware of is that cost reduction doesn’t make a company gain market share. Therefore, it would be smart of investors to research to find companies that are always looking to provide value. Companies of this nature are usually able to find opportunities in periods of recession to grow. Ford Motor Company is another company that created value by focusing on fuel effect vehicles during the recession. In the end, the company saw an improvement in its gross margin. Domino's Pizza (NYSE:DPZ), which invested in making new and improved pizza, is another example.

One simple way to identify companies that are potentially committed to delivering long-lasting value is by looking at the reason for which they were set up. For instance, Ford was set up to make vehicles affordable to middle-class Americans. With such vision, the company would always be on the lookout for ways to ensure that more people can afford vehicles, which can be seen in its focus on fuel-efficient vehicles.

In addition, Amazon was created to help people get what they need (originally books) at competitive prices without having to leave the comfort of their homes. It has also created platforms like the Amazon Mechanical Turk, an online marketplace that helps businesses like CastingWords, an American transcription firm, all the way to UK-based Take 1 Transcription, outsource tasks, which ends up helping businesses save money as well as helping unemployed folks make some buck.

Simply put, the companies we’re talking about here are always after making life easier for people.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.