While worries of another recession have cooled off in the last month, the prospect of the economy lurching to a halt remains a reasonable fear seven years into the bull market.
The S&P 500 has recovered from its February nadir, but it's still down over the past year and 5% off its all-time high last May. Economic history also tells us that major indicators like the unemployment rate tend to move cyclically, so as it descends below 5%, the prospect of an economic slowdown increases. With that in mind, it's always good to have few stocks in ones portfolio that can be expected to thrive during a recession. We asked of our contributors to select a few.
The company's business model is to purchase charged-off consumer debt from financial institutions for pennies on the dollar; it then contacts the debtors directly and attempts to collect. This has proven to be a winning formula for a long time; the company's revenue has been growing at double-digit rates for years. The 2008 recession provided the company with ample opportunities to purchase charged-off debt at favorable prices, and PRA Group's management team has proven itself to be adept at spotting bargains.
However, buying new charged-off debt at attractive prices in today's markets is proving itself to be a challenge, owing to the fact that several large financial institutions have decided to stop selling it on the secondary markets, which has greatly decreased the supply. The default rate in the U.S. is also very low right now, which has has further reduced supply. Add those two factors together and its clear why the company was forced to dial back its near-term growth expectations, which caused the company's stock to plunge.
In order to help offset its stagnant U.S. business, the company is expanding rapidly into international markets. It's also buying back huge amounts of its stock, which is probably a smart move since the company is still very profitable and its shares are down more than 60% from their 52-week high. PRA Group is also positioned for continued to growth once the supply of charged-off debt picks back up, which will happen in the next recession. However, until that occurs, the company's growth is likely to remain very modest.
Daniel B. Kline: When times get tough people look for affordable luxuries -- things that make them feel good without breaking the bank. In a recession, people also tend to start questioning some of their expenses, and anyone looking to cut back will take notice of the $4 to $6 drinks and $3 to $4 pastries sold by the leading coffeehouse chain.
Dunkin' Brands (DNKN) has some pricey offerings, but it also sells, as its name suggests, doughnuts -- delicious, indulgent treats which cost less than a dollar in most cases. It's actually possible to buy a doughnut and a cup of coffee for under $3 at the chain's more than 8,000 locations across 41 states.
In a recession, Dunkin' Donuts is a treat you can pay for with the change scrounged up from your dashboard. The company also extends that value model with its many combination deals, and the fact that around $12 scores you a dozen doughnuts give you a thrifty way to be a hero to your office.
Dunkin' Donuts is a working class brand that has always been a lower-cost alternative to its higher-end, fancy-pants rivals. That will serve the company well in tough times as regulars will keep visiting and people who can no longer justify spending $7 or $8 for a latte and a muffin will make the switch.