The value of stocks commonly declines during a recession. In theory, this does mean bad news for an existing portfolio. However, savvy investors often leave investments during this time rather than locking in recession-related losses by selling. In fact, Kavan Choksi mentions that these investors often choose to put their money on the reduced stock values of well-established companies. Long-term investors who put money to work during a recession usually do pretty well over time.
Kavan Choksi offers guidance on choosing to invest in value stocks during a recession
Value stocks refer to shares of large, well-established companies that trade trading below the price that analysts feel the stock is worth, based on the financial ratio or benchmark that it is being compared to. Stocks can become undervalued for many reasons, economical turbulences like recessions being one of them. Value stocks are among the most high-quality investments in a recession portfolio, and tend to potentially outperform growth stocks. As the economic growth of a country is down, growth stocks are unable to go up. Value stocks, however, capitalize on the down market and find opportunities at sale prices.
However, to develop an effective bear market investment strategy, comprehensive analysis is extremely important. This implies to digging into the value stocks and gaining a good understanding of the company. Periods of increased volatility, like recessions, often create opportunities as stock prices go on to diverge from company-specific fundamentals. However, this does not mean that investors can deviate from the investment process just because of larger-than-normal market swings. Rather, they need to focus on evaluating the value stocks on the basis of the underlying strengths and weaknesses of the specific company. The cash flow, assets, liabilities, management team, as well as demand for its products and services both in and out of a recession, must be taken into account. Emphasis should be put on companies that are not just strong enough to stay afloat during a recession but can actually come out stronger on the other side.
As per Kavan Choksi, even though the past performance of a company does not always guarantee how it shall fare in the future, considering the track record of value stocks can definitely help in making smarter investments. One must research to check how particular value stocks have performed during previous recessionary periods, to get a baseline reference to compare when investing during a recession. In addition to the overall performance of a company, the stability of dividend-paying value stock distributions must also be taken into account. The dividend history of a company is quite a good measure of its financial strength. If a business has increased or at least managed to maintain its dividend through previous recessions then that is a good sign.
While value stocks can prove profitable as part of a recession investing strategy, it still is vital to properly manage risk in the portfolio. Investors need to be proactive about seeking downside protection. They can look for cash-rich companies with minimal debt, or even go for large-cap stocks that can provide an edge if the companies have the financial flexibility needed to stay solvent during an economic downturn.