Benzinga published a list of five stocks it says investors may consider during an economic depression. The list includes VAALCO Energy, Synopsys, Netflix, Campbell Soup, and IBM. The article argues that selecting the right companies can help investors protect their financial interests during periods of uncertainty.
The publication defines a depression as a period of extreme economic downturn that often lasts for several years. During such times, prices and world trade fall, unemployment rates rise, and the economy sees consistent negative gross domestic product growth. Many economists define a depression as a drop in real GDP that exceeds 10%. This is more severe than a recession, which is usually defined as two consecutive quarters of decline in quarterly real GDP. A recession may lead to a depression if it continues for at least two years.
The U.S. has experienced several recessions but only one major depression, known as the Great Depression. Following the stock market crash of October 29, 1929, economic output in the United States and abroad suffered sharp declines. Estimates indicate that GDP dropped by 15%, agricultural prices fell by more than 60%, and unemployment peaked at 25.6%. While many companies went out of business and consumers tightened their belts, some stocks survived and a few increased in value.
Benzinga notes that many stocks that rose during the Great Depression were defense stocks, such as Electric Boat, now a defense subsidiary of General Dynamics. This was because the U.S. was gearing up to enter World War II and drastically increased its defense budget. The publication suggests that learning from the innovation and commitment to versatility shown by these companies can help predict which stocks will best survive future economic downturns.
The article identifies three key characteristics of companies that survive periods of economic uncertainty. First, a long history that spans multiple markets helps companies withstand bull and bear markets. Second, innovation and quality are essential; companies with large research and development budgets are more likely to have the tenacity needed to make it through a depression. Third, wholesale and discount retailers often do well because families cut back and save money during downturns when unemployment and consumer confidence fall.
Benzinga also highlights that economic downturns can present opportunities to buy stocks below their fair value. It cites Warren Buffett and John Templeton as examples of successful investors who used periods of economic downturn to enhance their portfolios. The key to successfully investing through a depression is choosing stocks with strong company fundamentals, including unique value to customers and continuous innovation.