These 4 Stocks Could Hold Up Well If A Recession Comes…

I’ve spent my fair share of time at the track with my nose buried in a racing form. It’s not uncommon to see the same two horses run against each other multiple times in a season. King Candy may have finished ahead of Cowboy Dan in March, then again in May, and then again in July under similar conditions.

One race can be a fluke. Three is a pattern.

If these rivals race again (barring a change in jockey or distance), my money says the speedier King Candy will probably reach the finish line ahead yet again. Track records can’t predict the future, but they at least arm handicappers with pertinent information to make an educated guess.

Why do I bring this up? Because the same is true with historical stock behavior.

With holdings that range from casinos to supermarkets to department stores to boat manufacturers, I keep my finger on the pulse of consumer spending. And as I’ve discussed recently, there are some worrying signs.

That’s why, a few days ago, I wrote about stocks that tend to hold up well during downturns.

They may be recession-resistant or, in rare cases, even recession-proof. But that doesn’t necessarily mean that pharmaceuticals, utilities, and household staples stocks are bulletproof. Diageo (NYSE: DEO), the owner of beloved brands such as Captain Morgan, Crown Royal, and Guinness, followed the S&P lower last year.

But it does mean these all-weather performers can provide some shelter. They are built to withstand storms. Regardless of GDP, they can typically go on generating robust cash flows and raising dividends, putting a floor under the share price.

Today, I want to tell you about one industry I’ve got my eye on. If history is any guide, it could hold up particularly well.

Cars Are Getting Crazy Expensive

But there is one sector that is uniquely poised to thrive. If consumers retrench and postpone the purchase of big-ticket items, then it could be a tough stretch for the auto sector. After all, you won’t find many bigger tickets out there than a new car or truck.

According to Consumer Reports, the average national price for a new vehicle has surged to $48,000. That’s an increase of $10,000 (26%) from just three years ago. Inflation is largely to blame, along with well-documented supply chain woes. Rising labor costs have also been a factor, even before the United Auto Workers (UAW) union went on strike demanding a 40% pay raise and a shorter workweek.

But there is another force at work.

If you haven’t been car shopping lately, you might notice numerous models conspicuously missing from dealer lots. That’s because they’ve been discontinued. This year, the Ford Taurus, Buick Encore, Chevy Spark, Toyota Avalon, and Honda Insight have all been axed from production.

Automakers are de-emphasizing smaller, more economical compacts and sedans in favor of more profitable trucks and SUVs. JD Power estimates that these larger vehicles now account for four out of five (80%) auto sales. Consumer preference is part of the reason, but manufacturers are also prioritizing higher-priced vehicles amid a continued shortage of computer chips.

Ford doesn’t even offer a regular sedan anymore. But it moves a lot of F-150 pickups – at MSRP prices ranging up to $80,000 for some trims. Talk about sticker shock. And to make matters worse, financing rates for new vehicle loans have shot up to 7%-8% for standard credit borrowers.

The average monthly note for a new vehicle? Try $725. That is prohibitively expensive for many buyers. And used vehicles aren’t much better, with an average note of $516, according to Experian.

Don’t Buy It, Fix It.

That’s why families are delaying trade-ins and trying to extend the life of their cars as long as possible. There are 284 million registered vehicles driving on U.S. roadways, and the average age just hit a record high of 12.5 years. That’s up from 11.4 years a decade ago in 2013 – when many cars and trucks still in use today first came off the assembly lines.

Source: S&P Global Mobility

4 Stocks To Consider…

It goes without saying that cars, just like humans, require more maintenance and service as they age. My 2015 Dodge Durango has undergone operations for a new air compressor, alternator, and brake pads within the past year. But at 200,000 miles, it’s still going strong.

If your mechanic seems busier than usual, it’s probably not your imagination. The convergence of rising new car prices, higher borrowing costs, and decreasing consumer appetite all accelerate this trend.

This is exactly why it’s time to look under the hood of the auto parts sector. Here’s a simple screen I ran, which shows the major players.

Americans spend a colossal amount of money maintaining their cars and trucks each year. The market runs anywhere from $100 to $120 billion in annual revenues, depending on the source. The four biggest players control roughly half of that, while the rest is scattered.

These well-stocked stores carry the full spectrum of car parts and accessories, from routine maintenance (fluids, filters, batteries, and windshield wipers) to replacement radiators, brake rotors, and engine timing belts. Need a camshaft position sensor? They’ve got it. Their websites will list thousands of results for automatic transmissions alone, often accompanied by a vast video library to help with installations and other projects.

This business used to benefit from auto enthusiasts’ DIY (do it yourself) ethos. But due to the increasing complexity of today’s vehicles (controlled by sophisticated arrays of semiconductor chips), the do-it-yourself (DIY) segment is growing slower than the do-it-for-me (DIFM) market.

Either way, this sector has proven to be remarkably resilient during recessions and bear markets. So if you’re looking for shelter in the coming months, this is one of the first places I’d look.

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