Are Large Cap Consumer Staple and Health Care Stocks Really Recession Proof?

A recent poster on this blog commented on the "Anti-Recession Stocks that can survive a US Slowdown" blog post. The poster said:

Well you were most certainly wrong. Too bad folks like you can't get out of the mindset that just because a company is big and been around a while doesn't mean it's stock will do well.

Let's evaluate the stocks chosen in the previous blog entry to see whether or not the stock selection was wrong. The assumption is that large consumer staple and health care stocks tend to survive slowdowns and recessions.

Assumption: Sector Rotation

But first, let us look at an assumption. Let us assume that a portfolio is 100% in stocks, and whether the market goes down or up, the portfolio manager (you) has to remain 100% invested. In this case, we have to either hold the stocks we currently own, or we have to rotate into other stocks.

Many professional money managers have to do the same. They are supposed to maintain a percentage of their fund in equities, and when the market goes down, they could rotate stocks from one sector to another.

The Slowdown/Recession playbook tells us to rotate into large cap consumer staples and health care stocks as a safer investment to ride out the slowdown or recession.

With this assumption in mind, six stocks were selected in the previous blog post that were "anti-recession." Most are large cap, consumer staple or healthcare stocks, except one, Sun Healthcare (SUNH) which is a small cap health care stock.

Performance of the Stocks

From January 7, 2008 (around the time the previous blog entry was written) to today, July 15, 2008, here is the performance of the stocks:

1. SPY (S&P 500 ETF): -13.47%
   
2. PG (Procter and Gamble): -10.27%
   
3. UL (Unilever): -25.97%
   
4. MO (Altria): -11%
   
5. GILD (Gilead): +15.28%
   
6. SUNH (Sun Healthcare): -17.71%
   
7. PEP (Pepsi): -14.2%
   

All of the results above do not include dividends. If you include dividends, the performance of the stocks above would be better.

In addition, instead of choosing SUNH, we had chosen it's competitor, Kindred Healthcare (KND), the return during this period of KND would have been +20.16% instead of SUNH's -17.71%

The Results

Period: January 7, 2008 to July 15, 2008:


Average of the Six Anti-Recession Stocks (no dividends): -10.65%
S&P 500 Performance: -13.47%


The Six "anti-recession" stocks outperformed the market by almost 3%. In this difficult bear market, outperforming the market is a good thing.

Check Performance Now

Biotech has been breaking out

How to Play: Am I Diversified (Diversifying your Stock Portfolio)

In Jim Cramer's CNBC TV show, "Mad Money", Jim Cramer has a segment where callers call in and mention their top five holdings. Jim Cramer then analyzes the stocks, and determines whether or not the caller's portfolio is diversified. Many other people on the social networking site Stockpickr.com ask the same question. But is there a way to determine on your own whether your portfolio is diversified or not? Definitely!

Sector Diversification

The main focus of "Am I diversified?" focuses on sector diversification. Many companies and analysts may have some variations, but there are around ten major sectors:

1. Basic Materials: These include gold, copper, composite material, chemicals, industrial metals, mining, forestry and paper companies such as FCX (Freeport McMoran), and ATI (Allegheny Technology).
   
2. Consumer Discretionary: Consists of General Retailers, Media, Travel and Leisure, Food and Drug Retailer companies such as TGT (Target), DIS (Disney), BBY (Best Buy), and SBUX (Starbucks).
   
3. Consumer Staples: Consists of Household Goods, Beverages, Food Producers, and Tobacco. Some others (such as those at ishares.com ) would include Automobile Parts, and Leisure Goods. Examples include PEP (Pepsi), MO (Altria), PG (Procter and Gamble), and SLE (Sara-Lee)
   
4. Energy: Consists of Oil & Gas Producers, Oil Equipment and Services, Coal, and Alternative Energies (such as Solar). Stocks include XOM (Exxon-Mobil), SLB (Schlumberger), and BTU (Peabody Energy).
   
5. Financial Services: Consists of National and Regional Banks, General Financial companies, Brokerages, Exchanges, Nonlife Insurance, Real Estate, and Life Insurance Companies. Examples include WFC (Wells Fargo), GS (Goldman Sachs), NYX (New York Stock Exchange-Euronext), AMTD (Ameritrade), PGR (Progressive Corp).
   
6. Healthcare: Consists of Pharmaceutical, Biotechnology, Health Care Equipment and Services, Healthcare Insurers. Examples include PFE (Pfizer), JNJ (Johnson and Johnson), MDT (Medtronic), GILD (Gilead Biotech), UNH (United Health Group), ISRG (Intuitive Surgical)
   
7. Industrials: Consists of General Industrials, Aerospace and Defense, Support Services, Industrial Engineering, Industrial Transportation, Electronic and Electrical Equipment, Railroads, and Construction and Materials. Examples include GE (General Electric), BA (Boeing), CAT (Caterpillar), UPS (United Parcel Service), UNP (Union Pacific Corp), DE (Deere), WMI (Waste Management), FLR (Fluor Corp), MDR (McDermott), and TEX (Terex).
   
8. Technology: Consists of Hardware, Software, Semiconductor, Internet, Networking, and General Technology Companies. Examples include MSFT (Microsoft), CSCO (Cisco), GOOG (Google), AAPL (Apple), IBM (IBM), INTC (Intel), NOK (Nokia), and RIMM (Research in Motion).
   
9. Telecom: Consists of Fixed Line and Mobile Telecommunication Companies. Examples include T (AT&T) and VZ (Verizon Communications)
   
10. Utilities: Consists of Electricity, and Gas, Water and MultiUtilities. Examples include EXC (Exelon Corp), TXU (TXU Corp) and DUK (Duke Energy).
    

How to Sector Diversify

So what you can do is look at each stock in your portfolio, and categorize them into one of the sectors above. After you go through your entire portfolio, you may find that some stocks may be grouped into a single area. For example, you may hold NYX (New York Stock Exchange-Euronext) and GS (Goldman Sachs). While one is a Stock Exchange, and the other is a Broker, both are grouped in the Financial Services Sector.

There are some companies that may be difficult to pin down to any one sector. For example, AMZN (Amazon). Is it Consumer Discretionary or is it Technlogy? Use your best judgement. If you want, during your analysis, you can put 50% of Amazon under Consumer Discretionary, and 50% of Amazon under Technology.

Sector Diversification is the main form of diversification preached by Jim Cramer.

Other forms of Diversification

Sector Diversification is not the only form of diversification. There are many other forms of diversification.

Market Capitalization Diversification

Companies have different market capitalizations. Some are very large companies (large market capitalization) like GE (General Electric), while some others, are small or mid capitalization companies such as NTRI (NutriSystem). Stocks of different market capitalizations behave differently from each other.

Growth and Value Diversification

Some stocks are considered Growth Stocks. Investopedia defines a Growth Stock as one whose "Shares in a company whose earnings are expected to grow at an above-average rate relative to the market."

Some other stocks are considered Value Stocks. According to Investopedia, a Value stock is "A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio."

So within a portfolio, you can further diversify by holding different styles of stocks from growth to value.

Peter Lynch, in his Book, One Up On Wall Street, further groups stocks into six categories:

1. Slow Growers
   
2. Stalwarts
   
3. Fast Growers
   
4. Cyclicals
   
5. Turnarounds
   
6. Asset Plays
   

International and US Diversification

Another way to diversify your portfolio is to hold stocks that are based in the United States, or based internationally. With international stocks, you can further group them into Developed International Markets such as Europe, Japan, and Australia, or into the Emerging International Markets such as Taiwan, Korea, China, Brazil, India, Eastern Europe, Africa, Middle East, and Russia.

Speculative and Non-Speculative

In his books (such as "Real Money: Sane Investing in an Insane World") and his shows, Jim Cramer preaches that up to 20% of a (discretionary, not retirement) portfolio could be allocated to more speculative stocks. This is yet another form of diversification.

Conclusion

So in order to have a diverisfied portfolio, be sure to diversify across several industry sectors as mentioned above. You can also choose to diversify in other ways as well such as market capitalization, growth vs. value, speculative vs. non-speculative, US vs International Diversification.