Could shares like Bapcor Ltd (ASX: BAP) or Woolworths Group Ltd (ASX: WOW) be your saving grace in an Australian recession?
With many experts and investors worried about a recession and obsessing over an inverted yield curve, what can you invest in to protect your wealth during a downturn?
There are a few key traits to look for in a business that may indicate it could perform well in a downturn.
First, defensive earnings; a company that can provide stable earnings and profit regardless of the conditions of the market as a whole. Second, international exposure. A company that only operates in Australia is obviously much more vulnerable to an Australian recession.
Here are some companies whose operations may fair better than most in a recession.
Bapcor Ltd (ASX: BAP)
Bapcor is a company providing aftermarket automotive parts and accessories. At first glance, this may look like a company that would perform poorly in a downturn. It is in the consumer discretionary sector, and consumers spend less on discretionary goods in a downturn, right?
Well, it is arguable that consumers will be less likely, or able, to purchase new cars during a recession, meaning they will try to make their current car last longer. To do this, they will need access to spare parts and accessories; repair the car instead of fixing it.
Bapcor is also a growing business with 178 stores in its Burson chain and a gross margin of 47%. They have also recently expanded into New Zealand and Asia, providing further opportunity for growth and further diversity to protect them during a downturn.
Bapcor shares currently have a trailing dividend yield of 2.74%.
Nanosonics Ltd (ASX: NAN)
Nanosonics manufacturers the Trophon EPR ultrasound probe disinfector and its related consumables. Nanosonics is seen similar to the Gillette model as customers buy the Trophon EPR system (the razor), then buy consumables (blades) which are high margin and recurring.
This is a company with a solid business model that creates recurring revenue likely to continue even during a downturn.
Nanosonics is also an international business, meaning they are less exposed to a singular market. Most revenue comes from North America, but they also operate in Europe, the Middle East and the Asia Pacific region. It is a fast-growing company with revenue up 36% in 1H19 and net profit up 221%.
Woolworths Group Ltd (ASX: WOW)
Woolworths, together with Coles Group Ltd (ASX: COL), dominates the fresh food and grocery market in Australia. This is a highly stable sector as they provide goods that are completely necessary, even in a recession.
The big reason I would invest in Woolworths over Coles during a recession is the dividend. Woolworths shares currently offer a 3.13% dividend yield, while Coles is expecting to pay their first dividend in September this year.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.