Dos, CEO of Stockmetrix

May 15, 2018

Originally published on
www.stockmetrix.net

TOP 5 RECESSION-RESISTANT
INDUSTRIES.

With all the rumors about the upcoming market correction that
can be followed by a recession, I have started my own research
with the purpose of finding the industries that have been the most
immune to the past Recessions. In the process, I analyzed these
industries’ current states and realized that anyone, not only me,
would want to know where to locate stocks that will protect you
from huge losses and show good dynamics at the same time.

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So here I share my research results and try my best to get you
closer to finding such stocks.

There are some good articles about this on the Internet. All of
them, however, give only theoretical reasons for industries to be
Recession-proof and do not provide any information as to how
these industries are doing now.

My approach is more practical. I studied one quarter’s Net money

inflows and outflows of all USA industries using the StockMetrix
software to determine which industries reacted least to the
recessions of 2000 and 2008.

This article discusses the industries with money flows that do not
correlate with the US stock market
movements in the period from 2000 to the present moment.
To approximate the industries’ money flow, I have applied the
principle I used before for the stock’s technical analysis indicator
– Money Flow Index (MFI). It uses both share price and trading
volume to measure money inflow and outflow of the industry over
a specific period (one quarter).
In addition to analyzing Net money flows of these industries, I
have further examined them in terms of the four following
aspects to understand how well they are currently performing:

• Net margin of the industry;

• Expansion with regard to the revenue growth;
• Ability to convert revenue into cash;
• How much profit, on average, is generated from every dollar
invested in the industry.

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So here is my take on the Top 5 Recession proof industries:

1. Heavy Electrical Equipment

Surprisingly, Heavy Electrical Equipment is the industry that was
least affected by the two latest Recessions as it did not
experience significant investment outflows during them.
Furthermore, it now shows 0% correlation with the stock market
swings for the last 18 years.

This industry consists of companies engaged in the manufacturing

of large-scale electrical equipment that is used by the electric
power providers. The constant demand for energy must have
resulted in a consistent need of the products offered by these
companies.
However, even though it seemed pretty stable during the previous
Recessions, Heavy Electrical Equipment suffers substantive
money outflows that total to about 700 thousand US Dollars as of
today and are not that far from its historical minimum. So

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currently it is not in the best shape:
So currently, it is not in the best shape. A negative Net margin of
around 21% makes it very unattractive for me. It’s even among the
stock market’s Worst 10 industries in terms of Return of Assets. It’s
a definite “No” for me.

2. Uranium
Uranium Producers industry is the second most Recession
resistant industry on my list with 0.1% correlation of its money
flows with the stock market movements. It did have its downturn
during the 2008 Recession and experienced some money inflows
and outflows, but have stayed relatively stable over the years.

Uranium is critical for supplying the world with electric

power. In many countries, it keeps the lights on. It is also
the foundation of a global multibillion-dollar industry with
an immense investment promise.
Maybe, because of this, the sector now enjoys considerable net

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money inflows of around 274 thousand US Dollars as of today.
This industry’s current state seems even worse, however. Its
average net margin of -161% is the lowest it has been since 1998.
This is the worst Net margin in the entire stock market!
Meanwhile, its Average Return on Assets is the third worst (-7.8%).
So that’s not attractive either.

3. Diversified Mining
Companies from the Diversified Mining industry supply raw
materials for the products and equipment of a wide variety of
sectors, such as construction, automotive, aerospace, and
telecommunications, etc. This industry’s broad reach is probably
the reason why it is among the ones that have the least
correlation with the Market meltdowns.

Diversified Mining reacted to the 2008 market crash with some

money outflow and volatility that has lasted for about two
quarters. After that, though, it started to recover and showed
positive dynamics.

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There is nothing notable in this industry’s current state
analysis.Pretty poor Net margin and Operating cash flow ratio
make it not worthy of further research.

4. Oil & Gas Transportation Services

There is a constant demand for oil and gas regardless of the
current economic cycle. Oil is used for a vast array of products,
from petrol to pharmaceuticals. Thus, Oil & Gas Transportation is
considered the biggest sector in the world in terms of dollar value.
Oil sector companies depend on oil prices with their stocks
having a direct correlation with the oil price and economic cycles.
This, however, does not apply to the Oil and Gas Transportation.
Oil is transported primarily by rail and pipeline, and a decline in oil
prices or other economic events tend to have a mixed and often
muted effect on these two enterprises. This is probably the reason
why this industry has a reverse 0.86% correlation with the stock
market movements.

This industry is showing considerable revenue growth (25%) over

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the last quarter. Combined with its good ability to turn Revenue
into Cash (20% Operating cash flow ratio), this is a pretty
promising sign.
In spite of this, though, this industry incurs net money outflows,
amounting to about 5.2 million US Dollars as of today. There
might still be a temporary come back to the money inflows in
some time. I will keep an eye on this one, but be cautious with it
since it has a negative Net margin, which means its companies are
making losses.

5. Phones & Handheld Devices

The suppliers of mobile phones, broadband access, wireless
handsets, and accessories have also demonstrated less reaction to
the market downturns of 2000 and 2008. This industry has not
displayed any considerable fluctuations in money outflows and
inflows from 2000 up until 2015.

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Phones & Handheld Devices has a reverse 0.86% correlation with
the stock market movement. This is almost the same as having no
correlation at all. It shows no reaction to the stock market swings
of 2000 and 2008.

It’s currently showing a very high rate of revenue growth – around

41% – which makes it the 5th highest growth rate in the market. I
have also analyzed the Operating cash flow ratio to see how much
real cash the company makes, and it’s pretty poor. For every dollar
of the revenue earned, a company loses 33 cents. But this might
be due to its high tech nature.

Many companies within this industry might be in their product

development stage, or early stages of product release. If this is the
case, then they are worth following.

However I am not choosing this industry either because with a

Recession it’s extremely rare that the industry can keep up such a
high rate of revenue growth.

Deeper research
Looking for a more impressive industry I have continued my
search and looked deeper into the industries next in the list of
the Recession immune industries, or the industries that have a
small correlation of investor’s net money flows with stock market
movements. The seventh lowest correlation industry on the list is
the Drug Retailers with 1.4% correlation.

While evaluating Drug Retailers using these criteria, I’ve realized

that it is quite a sustainable industry. Net margin and Return on

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Assets for it are currently at the levels higher than ever before:
3% and 19%, respectively. Impressive isn’t it? The Operating cash
to Revenue ratio is a decent as well; the revenue is continuously
stable.

The industry is currently experiencing temporary investors’ money

outflow, but I consider the fundamental characteristics more
critical. The market shall eventually recognize these fundamental
qualities, making it even more attractive for potential investors.

Conclusion
None of the Top 5 industries seem to satisfy the conditions of
being safe during a Recession and showing positive dynamics
simultaneously. Drug Retailers, the seventh lowest correlation
industry, however, seems to be quite promising to me.
I have used Thomson Reuters Business Classification when writing
this article. You can find a list of companies that belong to a
particular industry using the Screener function within the
StockMetrix app.