If you've been paying attention to market trends or even casually watching the news over the last couple of months, there's a good chance you've seen or heard concerns that stocks are in the early stages of moving to a more bearish environment. With people weighing the implications of rising interest rates, political dynamics, and whether inverted yield curves for the two-year and five-year treasury bonds might signal a recession is on the horizon, it's not a bad idea to think about defensive investing.
With that in mind, we put together a panel of three Motley Fool contributors, and asked each one to profile a company that's worth owning ahead of a potential market crash. Read on to see why they identified Procter & Gamble (NYSE: PG), Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) (NYSE: BRK.B), and Hanesbrands (NYSE: HBI) as stocks worth holding through a downturn.
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If it's good enough for Buffett...
Rich Smith (Berkshire Hathaway): What stocks would I buy ahead of the next market crash? If I'm being honest -- none!
To the contrary, if you can tell me with 100% certainty that the stock market is going to drop 20% on Friday, chances are I'm going to sell a lot of stocks but buy precisely zero. (But yeah, after the crash is past, I'm probably going to do a lot of buying).
Problem is, you can't tell me with 100% certainty when the next crash will come -- nor can I tell you -- nor can the talking heads on CNBC tell anybody. So it seems to me that, failing omniscience, the safest thing to do is buy stocks that I think won't go down a huge amount whenever the next market crash does come.
And that brings me to Berkshire Hathaway.
Warren Buffett has spent the past 54 years aggregating some of the best businesses and some of the brightest business minds into a single company known as Berkshire Hathaway. I can't think of anyone I'd rather head into a market crash partnered with than Warren Buffett.
Now, Buffett has famously said he doesn't want to buy back Berkshire Hathaway stock himself unless the stock falls below 1.2 times book value. Yet last quarter, he did just that, spending $925 million to buy back Berkshire stock at an average of $207.09 per share -- 2% more than Berkshire costs today -- and about 1.3 times book. Whether or not a market crash lies right around the corner, it isn't every day an investor gets the chance to buy a stock that Buffett bought at a price better than Buffett got.
Wonder of wonders, that day is today -- and that stock is Berkshire Hathaway itself.
They call them "consumer staples" for a reason
Demitri Kalogeropoulos (Procter & Gamble): Procter & Gamble (P&G) shareholders have underperformed through much of the market's latest expansion, but this could be an excellent defensive stock to have in your portfolio through the next downturn. All the usual reasons for liking this blue chip giant still apply, including its large portfolio of consumer staples, like paper towels and diapers, which tend to sell well during recessions. There's also a generous dividend with an impressive streak of annual raises to help cushion your returns when the market dives. As always, P&G remains an extremely efficient business that churns out plenty of cash every year.
Then there are the extra reasons to like this stock beyond its defensive characteristics. P&G recently posted its fastest expansion pace in years, after all, as demand improved despite rising prices on brands like Tide, Bounty, and Pampers. If things go according to plan, its organic sales growth pace should double this fiscal year, while earnings rise by about 8%. Meanwhile, its cost infrastructure is much lower than it was a few years ago, and that means a higher proportion of those sales gains will translate into profits over the coming years.
Keith Noonan (Hanesbrands): With its solid lineup of time-tested clothing brands and a hefty returned-income component, Hanesbrands looks like a good stock for weathering a market downturn. The company's stock also already looks depressed, trading down roughly 28% year to date and nearly 50% over the last three years.
Most of the company's brands occupy a sort of middle-of-the-road space offering significant differentiation, but not priced at the premium levels that might send customers looking elsewhere in the event of economic downturn. Demand for products like shirts, socks, and underwear can be expected to remain relatively consistent, regardless of what the stock market is doing, and Hanesbrand's non-prohibitive valuation and big dividend should provide additional insulation from market volatility.
Hanesbrands has a forward price-to-earnings ratio of roughly 8.5, and the stock comes with a chunky 3.9% dividend yield that's well above the 10-year Treasury bond yield of 2.9%. And while the company didn't increase its dividend last year in favor of using free cash flow to pay down debt, Hanesbrands has tripled its payout over the last five years.
If the next market crash does pull the company's shares significantly below their current pricing levels, investors can at least look forward to an elevated dividend yield that can be channeled into reinvesting in the stock at a further discounted price -- and then reap the rewards as the broader market recovers.
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Demitrios Kalogeropoulos owns shares of Berkshire Hathaway (B shares). Keith Noonan owns shares of Hanesbrands. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.