Buying these 2 stocks is a good way to protect against a stock market crash

ANo one can pick good stocks when the market is booming, but you have to be more careful when the economy seems to be cooling. Some stocks, even those associated with strong companies, fall precipitously with the rest of the market when recessions hit because people have less buying power.

There’s a proven way to invest in tough times: find companies that thrive in recessions, the ones people turn to when money is tight, like General dollar (NYSE:DG) and Wholesale Costco (NASDAQ: COST). Both are solid defensive choices for investors in a downturn.

Dollar General continues to grow

Dollar General Chief Operating Officer Jeffrey Owen was promoted to CEO of the company last month when Todd Vasos stepped down after seven years. Dollar General’s expansion has continued unbridled by COVID-19, inflation, supply issues and labor shortages that have bewildered other businesses.

The discount variety store company had 18,356 stores in 47 states as of April 29, making it the largest retailer in the United States by location. It plans to open 1,110 new stores this fiscal year, as well as 1,750 store renovations and 120 store moves. So far this year, Dollar General shares are up more than 7% and the company has a price-to-earnings (P/E) ratio of 25.54.

Due to its large number of stores, Dollar General has strong pricing power with suppliers. It also has a loyal customer base, often because its stores serve areas underserved by retailers – small towns, low-income neighborhoods and places where the nearest grocery store may be 20 miles or more away.

The company has grown its revenue every year since its initial public offering (IPO) in 2009. That’s not to say the current climate hasn’t had a negative effect, as inflation has squeezed its margins. In the first quarter, the company reported revenue of $8.8 billion, up 4.2% year-over-year, but earnings per share (EPS) fell 14, 5% to $2.41.

Dollar General was already doing well and the recession is helping his business. It has posted five consecutive years of double-digit stock returns and has grown its revenue by 113.6% over the past 10 years. The company has seen its annual revenue increase every year since 1987, including from December 2007 to June 2009, which is considered the last recession.

Dollar General also has a dividend, which it has increased for five consecutive years by a total of 112%. It has just raised its quarterly dividend to $0.55 per share, giving it a yield of 0.87%. It’s not particularly generous, but it’s safe with a cash dividend payout ratio of 27.15%.

The company, in its guidance, said it expects another year of double-digit revenue growth (between 10% and 10.5%) and EPS growth between 12% and 14%.

Costco: Helping stretch money from shoppers and investors

At first glance, Costco appears to be an expensive stock, with a price-earnings ratio of 42.69. There’s a good reason for that: the company is so reliable that investors flock to it when a downturn looms. Its shares have fallen just over 3% so far this year, but have risen slightly in the past three months.

Costco is known for its giant toilet paper wrappers and $1.50 hot dog-pop combos (which are the same price as 1984), the type of items that budget-conscious shoppers appreciate. The company, which operates 830 warehouses, including 574 in the United States, is made for recessions, but also has great buying power for the less budget-conscious (it sells more wine than any any other merchant in the world). Over the past 10 years, its revenue has increased by 97.63% and its EPS by 189.7%.

COST revenue data (annual) by YCharts

Costo is a members-only discount warehouse that has grown in revenue for the past 12 consecutive years. When the last recession hit in 2007, the company fell from the fifth-largest retailer in the United States by revenue to No. 3, behind only walmart and Amazon, and it stayed there. The company earns money from its products and annual memberships, which ensures a stable cash flow.

This year, through July 3, the company reported that its revenue increased 15.3% compared to the same 44-week period in 2021. During the last quarter, the third quarter, the company reported revenues of $51.61 billion, up 16.3%. year-over-year and EPS of $3.04, compared to $2.75 in the third quarter of 2021.

In May, the company raised its quarterly dividend from $0.79 to $0.90 per share, the 19th consecutive year it has increased its dividend. The yield is 0.66% and the cash dividend payout ratio is 34.12%, very safe. The company also rewards investors with special dividends when it has a strong year. In 2020, it offered investors a special dividend of $10 per share.

Like Dollar General, Costco has the kind of scale that helps it fight inflation because it has pricing power with suppliers. Another big plus is that the company already pays its employees high wages, so it hasn’t been hit as hard by labor shortages as other retailers.

Hedging your bet

The best thing about these two retail stocks is their stability. You’re not going to see huge growth spurts, but both companies have consistently increased revenue year after year, whether or not this year saw a downturn. They’re built to do well during recessions because they have products that can save people money, but even if the current downturn doesn’t last long, companies will do well anyway.

10 stocks we like better than Dollar General
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They just revealed what they think are the ten best stocks investors can buy right now…and Dollar General wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of July 27, 2022

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Jim Halley has no position in the stocks mentioned. The Motley Fool holds positions and endorses Amazon, Costco Wholesale, and Walmart Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

About Matthew Berkey

Check Also

Transforming Education by Joyce Banda, Danilo Türk and Jorge Quiroga

At a time when investing in children should be an urgent priority, many governments in …