The standard way to invest in a recession is to buy shares in companies that make things people need and stay away from cyclicals. But with the S&P 500, things aren’t so simple.
There’s no question the US has some quality defensive names, but these often come with prohibitively high price tags. There’s one however, that I think’s worth a look.
Rubbish
Even in a recession, people keep producing rubbish. And Waste Management‘s (NYSE:WM) the biggest business that makes money by dealing with this.
As its name suggests, the company collects and processes waste products. And its no secret that the firm has a dominant market position in an industry that’s likely to grow over time.
The stock generally trades at a price-to-earnings (P/E) ratio well above the S&P 500 average. But despite this, it has generated terrific returns for long-term investors. Over the last five years, the stock’s up 127%, compared to 89% for the index. So the firm’s predictable cash flows haven’t come at the expense of total returns.
Growth and competition
Waste Management might be one of the most difficult businesses to compete with in the S&P 500. Possibly the firm’s biggest competitive advantage is its scale. An extensive network of collection vehicles and processing infrastructure gives the firm an edge when it comes to costs. And it creates a barrier major for competitors.
Waste Management also has scope for growth that shouldn’t be underestimated. Part of this involves increasing prices to offset inflation, but its prospects go much further than this. A global push towards sustainability incentivises the firm to develop initiatives that support this. And this looks like a durable trend that could support long-term growth.
Risks
It’s difficult to see much to dislike about Waste Management from an investment perspective. It’s hard to compete with and demand isn’t going away.
The biggest risk, in my view, is regulation. Changing legislation around the way things are disposed of could force the company to invest to change its existing practices. Waste Management isn’t directly regulated like a utilities company. But there’s enough interaction with local governments for this to be a meaningful risk for the firm.
In other words, while the regulated nature of the industry has the effect of raising the barrier to entry for competitors, it’s also a challenge. And investors should keep this in mind.
Recession resistance
It’s very rare that I think investors should consider paying a high price for predictable earnings. But Waste Management is the exception that proves the rule. The fact a business has been successful in the past is no guarantee of future returns. But it’s hard to see a meaningful challenge to the company’s position any time soon.
That’s why I think the stock might be one for investors looking for recession protection to consider. A strong position in a predictable industry is an asset in any environment.
