The S&A Digest: What Stocks Hold Up Best During a Recession?

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/01/2013

A poem for Porter… Private equity's lobbying efforts… Losing Dan Ferris?… Where to ride out a recession…

 Editor's note: Porter is traveling today. In the meantime, Goldsmith covers headlines and the mailbag and Ian explains where to stash your cash during recessions.

 The subprime mortgage defaults continue, but Dreman Value Management, Pioneer Investments, and Societe Generale all expect banking profits to continue growing. These three power players, with tens of billions under management, have been buying bank stocks at some of their lowest prices since 2001. Although the funds won't name the banks they're buying, value-investing legend David Dreman said that Goldman Sachs is a "good value."

 Again refusing to divest his PetroChina (PTR) position, Warren Buffett told a Berkshire Hathaway (BRK) shareholder to sell her shares if she wasn't happy with his company's holdings. The woman, who objects to PetroChina's tangential involvement with the Sudanese government, replied that she wouldn't sell her shares, only because then she wouldn't have any say in Berkshire Hathaway's operations.

 Private-equity groups, worried about government interference, have launched a lobbying effort. Douglas Lowenstein, head lobbyist for the Private Equity Council, said that policymakers' knowledge of the industry is "extremely low." He fears that this lack of information and the large sums of money brought in by these firms might prompt policymakers to increase scrutiny and possibly raise taxes.

 New Century's downward spiral continues… Lenders have cut off all funding to the subprime lender, pushing it one step closer to bankruptcy. Since the subprime debacle started last month, New Century has halted all new loans and lost 90% of its market cap.

 There were no new highs on Friday throughout our recommended portfolios.

 Not much by way of the mailbag over the weekend. Today's submissions are more about quality than quantity. Porter will return tomorrow. Let him know how you feel at feedback@stansberryresearch.com.

 "Hi Porter – I read with interest the 'Sins of Omission' S&A Digest. I have since been moved to craft this piece of doggerel...

From S&A a rare Submission (yes double entendre)

Of stakes not taken, and of Contrition;

But Porter S, these Sins of Omission,

Are washed with cash from your Erudition

Great work, Porter. And yes I had too much time on my hands today… and Big Al Gore DOES look like an alcoholic Frankenstein… hilarious!" – Paid-up subscriber DC Williams

 "Even if I knew someone at Berkshire, I wouldn't put in a good word for him. Selfishly, I want Dan Ferris for us, not to run Berkshire Hathaway. But like a 'lotto draft pick' I'll understand if he goes." – Paid-up subscriber Jim L.

 "Has Dan Ferris really applied for a job at Berkshire? I wish him all the best in his endeavors... HOWEVER... if he goes to Berkshire and thus leaves Stansberry, I will lose the benefit of his knowledge and ability! Good for him... and horrible for me!" – Paid-up subscriber Lynne

Regards,

Sean Goldsmith

Baltimore, Maryland

What Stocks Hold Up Best During a Recession?

Small-cap growth stocks get crushed during recessions.

Now, I'm not predicting a recession. The last two weeks, I've been analyzing what happens to the market following large one-day sell-offs, like the one that occurred on February 27. I found that, as isolated events, these large falls don't have any significance regarding the future direction of the market. In fact, the market often performs better in the months following these corrections.

But if a recession should occur, it would be nice to know a little bit about how various stocks will perform during uncomfortable times.

According to the National Bureau of Economic Research, the United States has undergone four recessions since 1978. During these periods, small-cap growth stocks have returned an annualized -6.7%, significantly worse than large-cap growth stocks, small-cap value stocks, and large-cap value stocks.

The following four charts show the performance of various categories of stocks since 1978.

Small-Cap Growth Stocks During Recessions 

Large-Cap Growth Stocks During Recessions

Small-Cap Value Stocks During Recessions

Large-Cap Growth Stocks During Recessions

GROWTH STOCKS LOSE

Two things strike me about the above charts – the returns and the volatility of those returns. As the following bar chart shows, small-cap growth stocks are the clear losers during recessions. However, there is another piece to this story. The returns of the two growth indexes during recessions were significantly more volatile than the returns of the two value indexes, meaning growth stocks' performance from one recession to the next varied significantly.

Annualized returns While in a Recession

Variability

(measured by standard deviation of returns)

CONCLUSION

If I had to invest my money in stocks during a recession – based on this study – I would choose small-cap value stocks followed by large-cap value stocks. In general, I would avoid growth stocks, especially small caps.

Good investing,

Ian Davis

March 12, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame