With some degree of confidence, we can tell what the weather will be today, tomorrow, and even later in the week. But a recession? Projecting when the economy will suffer contraction is a little more challenging. Fortunately for investors, it's not necessary to their success that they predict when a recession comes. Instead, they need to remember Hamlet's wisdom: The readiness is all.
One preparation investors can make for an economic downturn is to fortify their portfolios with resilient stocks that are likely to succeed -- stocks like Advance Auto Parts (AAP -0.81%), Dollar Tree (DLTR -1.41%), and Royal Gold (RGLD 0.92%).
Image source: Getty Images.
1. Advance Auto Parts
When the economy turns south and a recession emerges, consumers will often change their habits. For some, that means brewing coffee themselves instead of visiting the neighborhood cafe, while others may pinch their purse strings and put a large home purchase on the back-burner. Similarly, many drivers will start taking auto repairs into their own hands, eschewing trips to the local mechanic. Consequently, Advance Auto Parts, a business with more than 4,700 stores throughout the U.S., Canada, and Puerto Rico that provides aftermarket parts to customers, is a worthy consideration.
Don't think Advance Auto Parts can rev up the engines of investors who are looking to buttress their portfolios? Consider the stock's performance during the Great Recession. Throughout this period, December 2007 to June 2009, the S&P 500 sank 38%, while shares of Advance Auto Parts rose 15.4%.
Illustrating how motivated car owners can be to perform their own repairs, revenue rose steadily during the period of the Great Recession; similarly, Advance Auto Parts also reported comparable earnings-per-share growth.
Data by YCharts.
2. Dollar Tree
Another effective way consumers will try to stretch their budgets during a recession is by shopping at discount stores. And when it comes to leading discount stores, Dollar Tree is one of the most recognizable names. Operating more than 15,500 stores in 48 states and five Canadian provinces, Dollar Tree also runs stores under the Family Dollar and Dollar Tree Canada brands. The company plans on expanding its footprint in 2022. In addition to opening 190 Dollar Tree stores and 400 Family Dollar stores, it expects to renovate 800 Family Dollar stores.
Along with opening more locations, Dollar Tree seeks to drive sales growth through an initiative to revise its pricing strategy with the introduction of a $1.25 price point to the majority of Dollar Tree's products. The company implemented it in all Dollar Tree stores in the U.S. two months ahead of schedule. On Dollar Tree's fourth-quarter 2021 earnings conference call, CEO Mike Witynski articulated three benefits to the $1.25 price point, stating that it "enhances our ability to materially expand our assortments, introduce new products and sizes and provide families with more of their daily essentials at a great value."
3. Royal Gold
Lastly, those wary of a recession's onset may want to forego retail stocks and consider a more traditional approach: gold. Long heralded as a safe harbor investment, gold, in the eyes of many conservative investors, represents a solid way to hedge against a weaker dollar.
Instead of rushing to purchase the yellow metal in bullion form, gold bugs would be better served to consider a royalty and streaming company like Royal Gold. Unlike gold mining companies that dig the yellow stuff out of the ground, royalty and streaming companies provide upfront capital to miners, receiving a portion of the mined minerals or the ability to purchase the minerals at a preset price -- often at a discount to the market price. This affords them plenty of reward, but with a lesser degree of risk since they don't incur the risks inherent with operating and developing the mining operations.
Royal Gold has interests in a variety of minerals, but it's gold that represents the company's bread and butter. In 2021, for example, gold accounted for 74% of its revenue. Think Royal Gold's stock is no more advantageous than buying gold coins and bars? Think again.
Over the past 10 years, the price of gold has risen nearly 20%, while Royal Gold's stock has climbed more than twice that.
Data by YCharts.
The recession-ready takeaway
Of course, there's no single solution to girding your portfolio against a recession; ask a bunch of investors what their approaches are and you'll likely hear a bunch of different responses. Advance Auto Parts, Dollar Tree, and Royal Gold all offer compelling approaches to strengthening a portfolio. Currently, however, I'm particular to shares of Advance Auto Parts since they're on the discount rack. Trading at 12.5 times operating cash flow, Advance Auto Parts' stock is changing hands at a discount to its five-year average cash flow multiple of 13.9.
Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
