Recently, the DOW plunged 800 points—about 3 percent overall—due to fears that a so-called “recession 2019” might be similar to the one experienced in 2008. Exasperating those fears is the fact that the benchmark 10-year Treasury bond yield broke below the two-year yield rate. This is an omen that has reliably indicated recessions in the past.
The thought of a financial crisis is not one to make investors feel particularly optimistic about their assets. Many are now making a mad dash to find stocks that will hold up through the economic downturn.
Some experts will point to “sin industries”—that is, industries that provide adult fun or indulgences, like gambling and alcohol—as a sector that does well when things turn bad. This is because people tend to rely on sin industries to forget their troubles. Other experts will, as always, point to gold as a stable investment, no matter the economic climate.
Amidst all the recommendations you’re bound to come across, you might even hear some people argue that small-cap stocks are largely insulated from recessions. Believable on the surface, let’s find out if that argument actually holds water.
Are Small-Caps a Good Play for Recession 2019?
The thought process typically goes something like this: recessions tend to be caused by trade wars, and small-caps are (somewhat) trade-war-proof. Because they aren’t as dependent on international trade as most of the medium and large-cap companies, small-caps avoid tariffs, avoid market instability, and come out of recessions smelling like roses.
Unfortunately, that line of thinking simply isn’t borne out by reality. While it may be true that recession 2019 is being stoked in part by the heated trade war between the US and China, many small-caps are still finding themselves in the firing line.
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Small-caps are inherently risky, and investors tend to avoid risks in a recession. It’s not uncommon, though, for small businesses to do well in periods immediately following a recession, when the economy is beginning to improve and investors have more faith in companies that were able to weather the storm. But during a recession, pretty much no one feels like gambling with their investments.
A majority of companies will most likely be hurt by a recession in 2019, and small-cap businesses will be no exception. According to CNBC, despite a great start to the year, “the performance gap between small caps and large caps is currently widening to historic lows.”
If You’re Set on Small-Caps, Look to Healthcare
That’s not to say, however, that there aren’t certain small-cap companies better equipped to protect investments than others. One industry that’s known for providing safe small-caps in a recession is healthcare. These companies focus on aspects of the healthcare sector that remain important even in the throes of a recession.
Novocure Ltd. (NASDAQ:NVCR) is a medical device company focused on oncology, the treatment of tumors. The company’s therapeutic technology uses electrical fields to disrupt cell division in solid tumors. As it’s been educating doctors about its treatments, the company has been able to get its therapies covered by all major health plans in the US.
Last month, Novocure stock rose 32 percent. This month, it hit a 52-week high. With no sign that it will be affected by recession 2019, the price will likely continue to grow. Novocure is a stable investment because patients don’t have to pay for their own treatments. This means that even cash-strapped people who’ve lost money in the recession will be covered, and Novocure will prosper.
Another small healthcare company, Axsome Therapeutics Inc (NASDAQ:AXSM), has seen its stock jump 852.08 percent this year. Axsome treats disorders of the central nervous system through the development of new and exciting therapies.
Earlier this month, the company provided its corporate update for Q2. As part of the report, the company’s CEO Herriot Tabuteau said that “the next several months are expected to be highly active and potentially transformative for Axsome.”
Like Novocure, Axsome can expect to continue growing despite the impeding economic downturn because disorders of the central nervous system are always a problem. Axsome’s treatments are the most effective and the cheapest on the market, so they will remain the best choice for people in need.
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Other Small-Caps to Consider
Outside of healthcare, small-caps that provide discount or low-cost alternatives to regular industries might be your best friend for a recession 2019.
Take, for example, Spirit Airlines Inc. (NYSE:SAVE). Spirit made a space for itself in the traditionally difficult-to-profit-off-of airline sector by offering ultra-low-cost flights to people in a well-targeted area.
The company is always a good choice for flyers looking to save a buck, but when the economy takes a turn for the worse, more and more people are looking to avoid the outrageous charges of big-name airlines. While a recession has little to no impact on how many people need to use an airline, it has a tremendous effect on which airline they pick.
This is why Spirit—whose very ticker advertises the money you’ll “SAVE”—is considered one of the four small-cap stocks that will do well in a 2019 recession.
Beyond discount offerings, utility stocks are famous for having a strong defense against poor economic conditions. Unless the stock market crashes to such a capitalistically low point that society is driven back into the stone age, people will still need to pay their electric bills.
Among utility stocks, look for companies that offer green or renewable energy. Not only is this better for the environment, but governments are also tending to rely on this kind of energy more and more.
Innergex Renewable Energy Inc (TSX:INE) (OTCPK:INGXF) is just one small-cap company in the renewable energy space that’s seen consistent growth and is poised to continue growing. This Canadian company develops hydroelectric facilities, wind energy, and solar farms throughout North America. In all, it has over 30 facilities with a net capacity of more than 710 megawatts.
Innergex rang in 2019 at $12.87 and has since risen to $15.00. Like Spirit, it’s been cited as a small-cap with big potential, particularly in its dividend payouts.
Takeaway
As always, it’s important to do your own research before jumping into any of these companies. Small-caps are never a sure thing. However, by looking into which industries historically perform well in a financial crisis and, in particular, which ones offer small companies a chance to shine, you can weather the oncoming storm.
While rescission 2019—or recession 2020, 2021, 2022, etc.—is an inevitability, losing money doesn’t have to be.
Featured image: DepositPhotos © kbuntu
