Liberty One Investment Management Releases Thought-Provoking White Paper

"Defining and Investing in Recession Resistant Industries"

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Liberty One Investment Management released a thought-provoking white paper for distribution last week: "Defining and Investing in Recession Resistant Industries," by Nick Ng, CFA, Liberty One's Lead Portfolio Manager.

"Recessions and market cycles are an inevitable part of the investment journey," says Nick as he unpacks key elements of his research. "When it comes to recessions, not all industries are created equal. The impact a recession has on a company or an industry is as much technical as it is behavioral. Demand elasticity for a company's goods or services is just one variable to consider. Our research indicates there is a lot more to it than that."

The white paper goes on to discuss the benefits of investing in recession resistant companies and industries. By definition, recession resistant companies produce the goods and services consumers demand, regardless of the state of the economy. These industries typically have long track records of profitability. These profits turn into real cash flows and investors become the benefactor of these cash flows. Strong profitability over a long period of time naturally lends itself well to generating strong and consistently increasing dividend payments to investors. Further, strong excess cashflows create the potential for more stock buy-back opportunities during recessionary times - another benefit to investors.

The white paper discusses dividends and describes them as being a vital component to total stock market returns, including returns in recession resistant industries. Companies within recession-resistant industries typically pay an above average dividend that are supported by a stable earnings profile, strong cash flow generation, lower alternative investment opportunities, and high visibility of future earnings. The sustainability of such dividends can have dramatic impacts on long-term performances as the market has shown in the past to punish dividend cutters and eliminators while rewarding companies that grow their dividends over time.

Nick goes on to say, "Recession resistant industries are often thought of as defensive. In the traditional sense, they are.  They historically exhibit a low correlation to the broad market during recessionary times. However, dividends and buy-back opportunities are how companies in these industries play offense when economic times are tough. And if companies are playing offense, so are its investors. Also, very important to keep in mind, dividend payments to investors represent roughly half of the long-term total return of the broad stock market. In a very real sense, strong and consistent dividends from strong and resilient industries are great ways to play offense."

When asked about periods of strong economic expansion, Nick referenced the fact that during strong economic times, companies in recession-resistant industries can benefit from secular trends in higher global growth, increasing healthcare investments, and digitization of our global economy. 

Perhaps the most intriguing component of Nicks research is how he examines the technology space. Despite not being widely accepted as a recession-resistant industry, the evolution of business models in the technology industry coupled with the essentialness of the products and services they sell in today's modern economy, creates stark similarities with companies operating in traditional recession-resistant industries. Additionally, the resiliency of these businesses during downturns mitigates fundamental risks that become heightened during recessionary environments.

Liberty One's flagship investment strategies have historically leveraged the key components of recession resistant industries, says Nick. "We believe active management supported by strong research and diligence can protect against owning companies that eliminate or cut their dividends, trapped in a trajectory of market share losses, exhibit weak financial characteristics, and run by less than effective management teams. Ultimately, we believe investing in recession-resistant industry companies can protect investors during more turbulent times, but also offer investors attractive opportunities to invest in companies that can grow at superior rates over an exceptionally long period of time."

Examining and defining recessions, how certain industries behave during recessions, and how the defensive characteristics of companies in these industries can lead to excess returns in an investor's portfolio will certainly cause investors and investment advisors to look at recession resistant industries differently. Couple all this with the ever-changing, recession resistant characteristics of certain companies in the technology space, and one just might conclude that the greatest offense is simply having a solid defense.

Press contact:  Ben Pahl, President - ben@libertyoneim.com

Source: Liberty One Investment Management

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Categories: Investments

Tags: asset management, dividends, finance, investments


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Liberty One Investment Management
1509 North Milwaukee Ave
Libertyville, IL 60048
United States