Thursday, January 29, 2009

What To Invest In If The Economy Gets Worse

What companies should you be investing in if you think the economy is only going to get worse? Well you might think that's a stupid question, why would you want to invest in companies when they economy is going sour? Well believe it or not, there are some companies that might actually fair well. When investing, you can take two strategies. First, look at companies that will do well during the recession. Some of my favorites are Altria, Kroger, American Public Education Incorporated, and Advanced Auto Parts.  

How did I pick these companies? Well you want a company that has a product that people are not going to drop during a recession. That's where Altria comes into play. Altria Group owns Phillip Morris USA and John Middleton, amongst other cigarette manufacturers. Cigarettes are one of the things that most people will not stop buying when they look to cut down costs. Altria should be able to post steady revenue, which is so rare in a recession that people will be willing to pay more for the earnings (P/E ratio) which will send the stock price higher. They also have a nice dividend (more about this later). So pick a company that has a product people are not going to cut back spending on during a recession.

Kroger is another stock that will perform well. Kroger is a grocery store and when people cut back on spending, they stop going out to eat and start going to the grocery store. But there's another reason Kroger and other grocery stores make a good buy. You might buy Kraft or PepsiCo because, well if people are cutting back on eating out, they will buy Kraft/PepsiCo's products so they can eat at home. But that's not the case. These companies are brand names, which are more expensive. Often grocery stores offer their own brands, which are generic and therefore much cheaper. That's why I would buy a grocery store over Kraft. Because not only is Kroger going to see increased revenue just from the fact that people are flocking to the grocery store, but when people go to buy macaroni, they aren't going to reach for Kraft, they will go for the cheaper store brand. 

I talked about why I like American Public Education Incorporated in an earlier post, but just in case you missed it, I'll explain it again. As more and more unemployment occurs, people are going to be left trying to find out what to do with their time. One of the best ways to allocate your time is to further your education so you have a better resume for employers. But most the people who are being laid off have families and thus going to a college campus somewhere is not an option. But online school is. That's why I like American Public Education Incorporated, because they are in the online education business and their revenue is going to increase as more and more people become unemployed and enroll into online school.  So investing in online colleges might be a good idea.

I also talked about car repair companies in the same post, but I'll also mention them again. Advanced Auto Parts fits the idea that since people are cutting down on spending, they will not buy new things, but then they have to get things repaired instead- cars, for example. You may not be able to afford a new car right now, but you still need one. As less people buy new cars, the car fleet in America is getting older, and since most Americans need cars, they will have to get them repaired. Companies like Advanced Auto Parts and other car parts/repair companies will see their business revenue increase as more and more people bring their car in for repairs and new parts instead of buying new cars.

These are all companies that will play off the poor economy. You also have the option of investing in solid companies that have high dividends. Like General Electric, Johnson & Johnson, Bristol Myers, and AT&T. These companies all provide high dividend yields. The idea behind this strategy is that these companies are solid, well-run companies. In a bad economy, their share prices won't go up, but at least you can still make money off of the high dividends until the economy improves and their stock prices recover. But make sure the dividend is safe, if a company has loads of debt, no cash, and is paying a 20% dividend, obviously something is not right and they will end up cutting their dividend. Companies like Bristol Myers and GE have enough cash to pay off their dividend, so they make for a good investment.

I am not saying you HAVE to invest in these companies, but it is the strategy behind how I chose these companies that you should look at if you think the economy is not recovering anytime soon.

Be sure to check back tomorrow if you want to know what to strategies to take when investing if you think the economy has already bottomed. The next few days I will continue to give different investing options for different economic forecasts.

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