The key question facing investors right now is whether the COVID-19 pandemic and the the social isolation measures being taken to combat it will tip the economy into a deep and extended recession. Right now, the extent of the damage that coming is still hard to accurately predict.
But, assuming that a long downturn is imminent (or has already begun) investors can buy some protection against it by buying stocks of companies that have proved resilient during previous recessions. In this context, auto parts retailer O'Reilly Automotive (ORLY 1.05%), and animal health company Zoetis (ZTS 1.84%) and contact lens manufacturer The Cooper Companies (COO 1.07%) are worth a look.
O'Reilly Automotive
Auto parts retailers are traditionally seen as recession resistant. Consumers are more likely to defer purchases of new vehicles during economic downturns, which means they have to keep their older ones running. And the longer those older cars are kept on the road, the more they will need repairs and replacement parts.
Protect your portfolio from a recession by buying stocks that can increase earnings in a downturn. Image source: Getty Images.
During the 2008-2009 recession and its aftermath, O'Reilly's same-store sales growth accelerated.
Data source: O'Reilly Automotive. YOY= year over year. Chart by author.
That said, it might seem somewhat puzzling that shares of the major auto-parts retailers are down significantly in 2020. That's possibly down to concerns that the sudden cessation in economic activity caused by social isolation measures -- and the steep drop-off in the amount of miles being driven -- will heavily impact their sales.
That's certainly true in the near term. However, given the likelihood that the COVID-19 pandemic will ultimately be contained, it's highly likely that light vehicles will be back on the road, and at that point, O'Reilly's sales could recover sharply -- recession or no recession. As such, the recent drop in the share prices of auto parts retailer has created what appears to be some good buying opportunities for investors.
Data by YCharts
The Cooper Companies
People still need to drive their cars in a recession. They also still need to see, which means that many have to keep buying contact lenses. That's clear from the results Cooper delivered during the last recession, when it grew sales and earnings all the way through it. This makes Cooper an attractive stock to look at if you are looking for downside protection.
However, buying Cooper for the long-term isn't just a defensive play. In fact, Cooper has a number of long-term earnings drivers that make the stock worth looking at. For example, an aging demographic is likely to lead to more demand for eyesight correction. In addition, Cooper is seeing strength in its silicone hydrogel lenses -- more advanced lenses that allow more oxygen to reach the eye.
There's also an opportunity for Cooper to grow sales of its 1-Day modality lenses in the Americas. For example, the 1-Day modality only has 46% of the frequent replacement market in the Americas (the rest goes to two week or monthly modality) compared to 54% globally.
Most intriguingly of all, there's even the possibility that the COVID-19 pandemic will lead to a shift in consumer preference toward the 1-Day modality as its seen as cleaner option. For example, two week and monthly lenses need cleaning on a continual basis. It's a good question for management to answer on the next earnings call.
Data source: The Cooper Companies. Chart by author.
Zoetis
The company was spun out of pharma giant Pfizer in 2013 so it's not so easy to get an apples to apples comparison from the last recession. In addition, Pfizer added the animal health business of Wyeth following its acquisition of the company in 2008. Nevertheless, digging into Pfizer's SEC filings shoes that its legacy animal health product sales were flat on a currency adjusted basis in 2009 and increased 4% in 2010. That's a good performance during a major recession.
To be fair, animal health isn't completely recession resistant. For example, high unemployment could result in consumers making less trips to veterinaries, and if farmers are financially constrained they could reduce investment in livestock. That said, the evidence from Pfizer/Zoetis during the last recession is that animal health spending is not that cyclical -- it's still a good place to hide in a recession.
Moreover, Zoetis has powerful long-term trends behind it. A combination of a growing global population, increased urbanization, and a growing middle class in the developing world adds up to significantly increased demand for protein. That's good news for the company's livestock-focused sales such as anti-infectives, vaccines, feed additives and parasiticides. Meanwhile, companion animal focused sales can grow thanks to the increasing willingness of consumers to spend on pets.
