3 recession proof small-cap stocks

Investors’ greatest fears usually come true when a GFC-like event rocks markets. It’s at these times you find out who has been swimming naked with their stock selections.

During tough economic times, some businesses will fail to turn a profit because, put simply, their customers will be unable to afford their services. It’s one of the reasons it is imperative to thoroughly investigate a company before risking your hard earned dollars on the managers behind them.

However there are some exceptions to the generally held belief that market setbacks are good for no one. Some companies almost pray for a market setback in order to revive their own businesses.

For example the gold industry and its miners rely upon fear and uncertainty to drive-up prices of the commodity. The reasoning behind it is simple, gold is a globalised tradeable commodity which doesn’t succumb to the localised effects of currencies.

Gold miner Northern Star Resources Ltd (ASX: NST) is one company which will benefit from rising commodity prices. It has robust balance sheets, good levels of reserves, rising production and low costs.

But gold miners aren’t the only recession proof stocks available on the market. There are other stocks which may benefit even more from falling asset prices and rising levels of uncertainty.

When the market tumbles, high levels of debt can be troubling. Many people find themselves pawning goods to get extra cash and try to secure short-term loans. Cash Converters International Ltd (ASX: CCV) is a growing presence in the market for second-hand goods and short-term credit. Its services thrive in any economic environment.

Lastly, Collection House Limited (ASX: CLH) is probably the most likely to benefit when the economy takes a turn for the worst. It is a growing debt collection services provider which pays a stellar dividend. Although it competes with larger rival Credit Corp Group Limited (ASX: CCP), the market is lucrative and growing.

Foolish takeaway

It’s impossible to recession proof your portfolio but it’s imperative to identify companies which can both withstand a GFC-like event and thrive in it. If you don’t sufficiently research your investments, the chances of companies you own going into administration significantly increases.

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Motley Fool Contributor Owen Raszkiewicz owns shares in Cash Converters.

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