If we really are in for the kind of worldwide recession markets seem to fear, then which shares which will see out the storm?
I've been hunting for a few interesting ones in all shapes and sizes. I'm not as fearful as Mr Market, as I believe we're over the worst.
If you're nervous about pretty much everything then the Maslow's hierarchy of needs baseline – 'physiological needs' – may be a good starting point. These include our basic needs; air, water, and food, clothing and shelter etc.
And there are good value companies operating at the base of Maslow's pyramid. So if we're all kitting out the air raid shelters with shotguns and baked beans, metaphorically-speaking, what should we be looking at?
Over the last few days, I've been looking over our market, and finding plenty of opportunities. But if you've limited cash left to invest, and want to take a safety-first approach, then the real essentials providers should do well. As you'd expect, a few have fared a lot better than the overall market. But that doesn't mean they aren't good defensive value now.
Of the companies I've looked at, the following look good value Maslow-based baseliners to me:
Having looked again at the grocery sector in Australia, at today's prices, I still think Woolworths is number one. The company has an unshakeable foothold as the dominant grocery retailer, a top-notch culture and the runs on the board.
Metcash (ASX: MTS) and Coles, owned by Wesfarmers (ASX: WES) are solid successful businesses, and I couldn't fault you for preferring them, but for my money (literally – I'm a long time shareholder), Woolworths is the grocer to beat. The trailing yield of 4.7% isn't bad either.
This oil refiner almost defines 'cyclical' – its shares having done a creditable impression of a yo-yo over the past three years. Having touched a three-year low of $6.79 at the end of 2008, the price has fluctuated wildly to a high of $16.44 in March of this year. Now trading at just over $12, Caltex (ASX: CTX) isn't dirt cheap, but nor is it terrifically expensive.
Caltex shareholders need a strong stomach, but you can be sure that if the economy goes to hell in a hand basket, someone will still need to pump the petrol.
3. The Reject Shop
'When the going gets tough, the tough go shopping' – or so says the fridge magnet. While discretionary retail will get a pasting if the economy lands in the doldrums for a prolonged period, companies such as The Reject Shop (ASX: TRS) will likely have the best of it.
Nothing teaches thrift like adversity, and no-one does thrift like The Reject Shop. Its products are hardly necessities – that's why Woolies is number one on my list – but for very affordable household items and toys, The Reject Shop is hard to beat.
With very little in the way of long term debt, and with a share price suffering from a recent profit downgrade, the price isn't too demanding. If a couple or things go The Reject Shop's way, it could come out of a downturn in a very comfortable position indeed.
If the economy does suffer a prolonged downturn, share prices are unlikely to be spared. Regardless, both the patient holder and opportunistic buyer are likely to do well as long as they focus on quality businesses, and those businesses aren't holding so much debt that it puts the business at risk.
Sorry – I don't know where to buy shotguns!
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Scott Phillips is The Motley Fool's feature columnist. Scott owns shares in Woolworths. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson