Here’s one way to tell if your stock is ‘recession-proof’
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We’ve been pondering the next recession since the GFC. There have been warning signs, in 2011, 2015, 2016 and the last quarter of last year.
But Wednesday’s ‘inverted yield curve’ was the most ominous sign of all, considering every time it has happened in the last 40 years a US recession has occurred within two years.
It’s inevitable that if this eventuates investors will flee to safer haven assets and the majority of stocks will fall. But some will hold firm or even grow. How can you tell?
One way might be to look at industries people will always want. It is commonly said alcohol is one because people drink both to celebrate and commiserate. But an MIT study found alcohol consumption actually fell 6.5 per cent during the GFC.
This said, there are other technical measures which may indicate how it follows or doesn’t follow the market.
A company’s beta is a measure of how it aligns with the broader stock market. Theoretically if the beta is 1 the company should follow the market exactly – so if it goes up 2 per cent it should do exactly likewise.
Any number above 1 and the company should do better – for instance if a stock’s beta was 1.5 it should go up 3 per cent when the market goes up 2. If it is between 0 and 1 may follow the market but not as strong.
Any company with a negative beta is considered recession-proof because theoretically it will go up when the market goes down. However, it should go down when the market goes up.
There is a complicated formula to find beta or alternatively it can be found through Excel functions. The calculation essentially looks at a broader index and one company’s percentage returns over a period of time.
Now here is the stocks with highly negative year to date betas.
At the bottom of the list is Auspac Resources (ASX: APG) which began the year at 0.2 cents then fell to 0.1 cents on January 3.
It has had 3 brief bounces to 1.5 cents then one jump to 2 cents on August 2 but each time it has fallen back to one cent – hence explaining its negative beta.
You may be surprised to see Orthocell (ASX: OCC) on this list given its near quadrupling back in May due to its nerve regeneration treatment working. Prior to this it slowly fell 24 per cent in four months.
While it still is 179 per cent higher than in January, it has had a number of share price falls, minuscule in nature but most were the direst opposite to the direction the market is going.
Stockhead presents a list of ASX small caps by highly negative 1 month beta.
Austpac Resources (ASX: APG) lies third on this list.
Chongherr Investments (ASX: CDH) is at the heavy end of the list despite its 333 per cent gain on July 26. It has not moved at all since then while the market has moved substantially (although mainly downward).