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How Do I Pick Stocks in a Recession?

How Do I Pick Stocks in a Recession?

Recently, the global economy experienced the worst economic downturn in many years. Economies like the U.S. and UK suffered from recession. The fate of other developed economies such as Germany and Japan was also the same. Emerging economies like Brazil and China also suffered, although they did not see a recession. Although the world economy looks better at the moment, in this article we will look at the ways to pick stocks in a recession.

In recessionary times, consumers will avoid making purchases of items that are considered a luxury. This will include high technology gadgets, cars and other such items. However, consumers will not make any cuts in any spending that is deemed a necessity. This will include food items, utilities. In recessionary times, go for companies that are dealing in products or services that are deemed a necessity. Some sectors that you can look into during recessionary times are Healthcare, Utilities and Consumer Goods/Non Cyclical.

One very important investing rule to remember during recessionary times is to not overpay for stocks. In such times, you should always invest in stocks that are trading below their tangible book value.

Another important rule is to avoid stocks of companies that have been consistently reporting bad news. Avoid such stocks even if you feel that the stock is undervalued. This is because during a recession the bad news may continue. So even if you bought the stock at a bargain, the continued bad news can see the stock sinking even lower.

Penny stocks often have better investment potential than large caps during recession. Penny stocks do not have strong correlation to the broad market. More important, a single news item - granting of a patent, a new product in the pipeline, a good SEC filing - can completely revamp the outlook of a penny stock.

Investing in stocks is a risky business. In recessionary times, the risk increases even more. However, if you are patient and disciplined, you can survive such down periods and even come out on top.

Image by: Kevin Harber