Retail stocks that historically laugh in the face of recession

Shares of food retailers should do quite well if the U.S. economy slips into a recession in 2023, argues Bank of America.

The investment thesis is rather simple: in a tough time, people cut back on pricey nights out and instead stay home and cook.

All of that in-home party food comes from, you guessed it, grocery retailers such as Walmart (WMT), Kroger (KR), and Costco (COST).

And with all that buying, grocers see outsized positive effects on their sales and earnings.

“Food retail stocks (including grocers, mass discounters, warehouse clubs, and dollar stores) have mostly outperformed the S&P 500 during prior recessions (including the 1980s, the first Gulf War, the Dotcom Bubble, and the Global Financial Crisis),” said Bank of America analyst Robbie Ohmes in a new note to clients.

“We believe that this reflects that recessions tend to drive (1) increased food-at-home spending (the Bubble recession drove a pause in the decades-long shift toward food-away-from-home, while the Global Financial crisis resulted in food-at-home regaining share; and (2) greater consumer price sensitivity that favors consumer trade-down into the discount/value retail channels.”

Ohmes’ work shows shares of Walmart have out-performed the S&P 500 in each of the past five recessions.

Costco, Kroger, Target (TGT), Dollar General (DG), and Dollar Tree (DLTR) have also seen relative outperformance to the S&P 500 in prior recessions.

“All of the food retailers, including Walmart, are seeing strong grocery business in this environment,” Ohmes added on Yahoo Finance Live after publishing his note.

While food retail stocks may be a decent place for some investors to hide out amid an ongoing slowdown in consumer spending, discretionary retailers are on the other side of the coin.

In early June, Target kicked off concerns on the retail sector’s health with a shocking decision to liquidate massive amounts of slow-moving inventory and take a more cautious view on near-term profits.

Since then, discretionary retailers such as RH (RH), Bed Bath & Beyond (BBBY), and Kohl’s (KSS) issued financial warnings for the second quarter. Nike (NKE) took a more measured approach to its full-year financial outlook when it reported quarterly earnings.

Gap (GPS) also fired its CEO this week after another lackluster quarter.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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