Stock markets have rallied hard in recent weeks but the recovery may prove temporary as more details emerge on just how much damage the coronavirus has done to economies around the world. Chancellor Rishi Sunak already thinks the UK is in a significant recession.
This being the case, I think it’s more essential than ever that investors ensure they hold a properly diversified portfolio. Today, I’m looking at two FTSE 250 stocks from very different sectors that could help provide the recession protection they’re looking for.
“Exceptionally strong” trading
This morning’s trading update from general merchandiser B&M European Value (LSE: BME) goes some way to explaining why its share price has already recovered to pre-crisis levels.
The company experienced a great end to its financial year thanks to what it describes as an “exceptionally strong” performance in Grocery in March. Like-for-like revenues rose 6.6% over the 13 weeks to 28 March as the great stockpiling rush ensued.
The trend has continued into the new financial year with like-for-like revenues soaring 22.7% in the first eight weeks. Although people were making fewer trips to the stores, they were spending a lot more than normal. DIY and gardening-related items were particularly sought after. This makes sense given the lovely weather we’ve been experiencing and the fact that rival retailers were shut. Even so, revenue was still up a very healthy 10.3% if these categories are excluded.
All this has come at a cost, of course. The need to enforce social distancing and decision to pay higher wages to its workers during the pandemic means that operating costs have been higher than usual.
There’s also no getting away from the fact that the bounce in sales will likely prove temporary as things get back to ‘normal’ (whatever that looks like). The uncertainty over whether the coronavirus has been defeated or not makes providing guidance on trading rather tricky as well.
Nevertheless, I suspect B&M will fare better than most retailers during a recession as consumers become increasingly careful with their cash, even when it comes to staple goods. This makes the company a fairly defensive pick, in my opinion.
Sure, some of today’s good news already looks priced-in to the shares. At less than 17 times earnings, however, the valuation isn’t excessive.
Recession-proof
Another way of diversifying a portfolio in preparation for a hard recession is to get some exposure to gold. The precious metal is regarded as a safe haven in troubled times due to its tendency to be negatively correlated with global markets. It’s also a hedge against inflation and a weakening US dollar.
FTSE 250 African-focused explorer Centamin (LSE: CEY) looks a good play on this. The £2bn cap miner has a presence in Egypt, Burkina Faso and Cote D’Ivoire. It began producing from its main asset — the Sukari Gold Mine — 11 years ago.
Is an investment in Centamin devoid of risk? Of course not. The gold price can be volatile. Any drop also tends to be magnified in the stocks of those mining for it.
At 15 times forecast earnings based on current projections, however, the valuation still looks decent to me. The company has zero debt on its balance sheet and almost $350m in cash. At $172.9m, post-tax profit also came in 13% higher in 2019 than in the previous year. I’d buy it as a recession looms.
