Can you stay afloat amid tough economic times? These “recession-protection” stocks can save your portfolio! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Welcome to “The Independent Investor!”
We’re excited to share with you another useful investing insight today.
Every Wednesday, we publish articles about various investing tips and advice to help you strategically think about your financial choices and achieve true wealth in the long run.
Ready to know more about today’s topic?
Keep reading the article below.
Miles Everson
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
In March 2023, U.S. traders gave the central bank an 85% probability of raising interest rates at the next Federal Open Market Committee (FOMC) meeting.
According to Robert Spivey, Director of Research at Valens Research, this came as a surprise, considering higher rates were a key contributor to the second-largest bank collapse in the history of the U.S.
However, with much of the damage contained, the Federal Reserve still has lots of work to do to combat inflation.
Let’s backtrack a little bit…
Photo courtesy of Morningstar
In February 2023, the FOMC boosted rates by 25 basis points, bringing the federal-funds rate to 4.75%. The Fed made it clear that it would keep raising interest rates as long as the U.S. economy stays hot.
Spivey said this hurt lots of industries outside of banking. The rising interest rates left companies with large debt obligations particularly exposed.
This was one of the reasons why the Silicon Valley Bank (SVB) collapsed: It was a favorite of venture capital (VC) firms… and when these firms started worrying about paying their bills and withdrew from SVB, the bank needed more cash.
Most of SVB’s money was in supposedly “safe” assets like mortgage-backed securities and U.S. Treasuries.
The problem?
The value of these assets dropped due to rising interest rates! This meant SVB had nowhere to go to raise enough money.
Similarly, private equity firms survive on mergers and acquisitions (M&A). In order to buy other companies, develop them, and sell them at a premium, these PE firms need to borrow money.
The thing is, when the cost to finance such acquisitions rises, these private equity firms find it harder to make the big returns investors are expecting.
That’s why for Spivey, businesses need to focus on cutting costs and boosting their efficiency to stay afloat, especially in today’s economic environment.
Why You Should Have Some Form of “Recession-Protection” in Your Investment Portfolio
Many people view consulting services as expensive. That’s why it’s no surprise that lots of folks assume these services might be the first ones to go when firms start slashing their budgets.
These people couldn’t be further from the truth.
Contrary to popular belief, consulting firms are actually resistant to recessions. After all, they are the ones clients need most during tough economic times.
Allow us to explain further…
Instead of paying consultants to work on growth opportunities, clients hire these professionals for outsourcing and cost-efficiency. Because of that, consulting firms tend to have stable revenue through economic cycles.
Take for example consulting giant Accenture’s performance over the last 15 years. Based on Uniform Accounting standards, the firm has consistently generated a Uniform return on assets (ROA) of above 40%.
That’s more than three times the corporate average!
What’s more?
Accenture’s Uniform ROA didn’t even budge during two crises: The 2008 Great Recession and the 2020 COVID-19 pandemic.
In fact, in 2008, the company’s stock fell less than 10% when the entire S&P 500 fell almost 40%. In 2020, Accenture’s stock rose 24% when the S&P 500 was only up around 16%.
The firm’s profitability also grew above 60% for the first time ever in 2020. This shows that instead of hurting the firm’s revenues, the pandemic ended up helping Accenture.
… and just to let you know—Accenture wasn’t the only one. Other big consulting firms like Boston Consulting Group (BCG), Deloitte, and Ernst & Young (EY) all had record years in 2020, too.
This proves that when other companies feel like they’re on shaky ground, they turn to businesses that can help them pull through.
—
The Fed’s rate hikes are showing no signs of slowing down. Eventually, it will tip the U.S. markets into a recession.
According to Spivey, if and when that happens, it will be another great opportunity for consulting firms. History has shown that these stocks hold up well in a downturn… and there is no reason to believe this time will be different.
This is one of the reasons why Spivey and his team at Altimetry Financial Research include consulting stocks in their monthly advisories. These stocks serve as a reminder that investors should always be holding some form of “recession-protection” in their investment portfolios.
Take note of this important investment insight!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
LITERALLY.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
Our goal?
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Cheers,
Kyle Yu
Head of Marketing
Valens Dynamic Marketing Capabilities
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www.valens-research.com
