What recession proof businesses would you recommend for the upcoming year?
June 22, 2022
by an intermediary from University of British Columbia - Sauder School of Business in Vancouver, BC, Canada
With the talks of the recession coming in soon, do you have any particular business recommendations?
While everyone recommends healthcare and education, does anyone have any specific businesses in mind which are less concentrated?
from New York University in Washington, DC, USA
Professor Damodaran researches and posts the un-levered betas for 94 industries. Damodaran's analysis indicates that financial services (non-bank & Insurance), retail (grocery and food), bank (money centers) Telecom (wireless), and telecom services have un-levered betas of .41 or less. At these levels of asset beta financial services, grocery and food retail, money centers, and telecom are the least affected by changes in the broader market. Damodaran's analysis indicates that Retail (Building supply), home building, and retail (online) have un-levered betas of 1.11 or more. A recession proof business is expected to have a negative correlation to the broader market. All industries are positively correlated.
Engaging in a business with low levels of correlation to the business cycle is a good start at hedging against a broad market downturn. However, low levels of correlation do not shield you from the affects that a broad market down turn has on your business, it lessens the impact. If the broader market enters a recession say 20% a business with the lowest correlation to the business cycle (financial services, non - bank and insurance, beta .11) is expected to decline by 2%, Online retail (beta of###-###-#### is expected to decline by 22.2% the un-levered beta for health care (includes four sub sectors) is .73. The un-levered beta for education .93. The best a manager is able to do is identify an industry that experiences less impact from changes in the broader market.
There are no recession proof industries and there are no recession proof companies. 1.41, 1.23, 1.33, 1.34, 1.09. the equity betas (includes leverage) of Facebook, Apple, Amazon, Netflix and Google collectively FAANG the beta of an equally weighted portfolio of FAANG is###-###-#### The 20% market downturn pushes this portfolio down by 25.6%. Stay away from consumer electronics, online retail, content production, and tech.
Follow the data. A low un- levered beta shields the investor from the full effect of the market down turn. Identify an industry that is attractive, has a risk profile (measured by beta) that you are comfortable with, and make your decision based on the best information, decide how much leverage makes you uncomfortable and operate at lower levels (this being a micro LBO thread high levels of leverage are the name of the game). Do not spend time looking for something that the data suggests does not exist.
from United States Military Academy in Houston, TX, USA