Investing in a Recession
In a recession, investors need to be sensitive but stay on the lookout monitoring the market landscape for opportunities to pick up high-quality assets at discounted prices.
When a recession is on, the worst-performing assets are highly leveraged, cyclical, and speculative. Companies that fall into any of these categories can be risky for investors because of the lurking possibility they could go bankrupt.
Contrarily, investors who want to survive and thrive during a recession will make wise decisions on their investment strategy. Decisions like investing in high-quality companies with solid balance sheets, low debt, and good cash flow. The companies should also be in industries that have historically done well during tough economic times.
Highly Leveraged Companies
In a recession, investors should refrain from highly leveraged companies with substantial debt loads on their balance sheets. These companies often suffer under the burden of higher-than-average interest payments that lead to an unsustainable debt-to-equity (DE) ratio.
Companies with more bargaining flake are more susceptible to tightening credit conditions when a recession hits.
While these companies strive to make their debt payments, they also contend with a decline in revenue brought about by the recession.
The possibility of bankruptcy (or at the very least a steep drop in shareholder value) is higher for such companies than for those with lower debt loads.
Stocks that move in the same direction as the underlying economy is at risk when the economy turns down.
When the economy falters, consumers typically reduce their spending on these optional expenses. Because of this, cyclical stocks in these industries tend to suffer, making them less attractive investments for investors during a recession.
Speculative stocks are richly valued based on optimism among the shareholder base. This optimism is tested during recessions, and these assets are typically the worst performers in a recession