With the stock market already down substantially from its highs, it is hard to worry too much about a market crash. But if we happen to have one, what should an investor do? As a general rule, selling during a crash is usually the wrong investment decision. Rather, investors should take a look at defensive stocks as places to invest new cash while the selling continues.
Let’s take a closer look at three names that should be on the list of potential stock purchases in the event of a market crash.
1. STORE Capital: Triple-net lease companies have defensive characteristics
STORE Capital (STOR 2.74%) is a real estate investment trust (REIT) that focuses on developing single-tenant properties and then leasing them out under a triple-net lease arrangement. The company name itself is an acronym, which stands for Single Tenant Operational Real Estate.
Triple-net leases are different from the traditional type of leases one usually encounters. The most common lease type is a gross lease, where the tenant is responsible for rent and the landlord handles maintenance, taxes, and insurance. This is the way the typical residential apartment lease works. Under triple-net leases, the tenant is responsible for maintenance, insurance, and taxes under leases that generally last a decade or longer.
In order to make this sort of financial commitment, STORE Capital focuses on steady companies with strong unit-level profitability and the financial strength to withstand a recession. Just under half of its tenants are in the services businesses, primarily restaurants, fitness, or auto repair. Some 42% are retail, including drug stores and grocery stores. The rest are manufacturing.
The level of financial stability this kind of operation creates has appeal to certain types of investors. For instance, STORE Capital is a holding of Warren Buffett’s Berkshire Hathaway.
Businesses like auto repair, grocery stores, and drug stores are highly defensive industries that rely on REITs like STORE Capital. In the event of a market crash, these types of operations will hold up well. The big test for STORE Capital came with the COVID-19 pandemic, and it managed to raise its dividend in 2020 and 2021. At current levels, it yields 5.5%, which is an attractive yield for an income investor.
2. Bank of New York Mellon: Reliance on fee income is a plus during a recession
Bank of New York Mellon (BK 0.35%) is a large trust bank, which differs from the typical commercial bank. Commercial banks generally take deposits and make loans. This makes banks highly susceptible to the credit cycle. Trust banks do make loans; however, they earn the bulk of their revenue through fees, not interest income.
Bank of New York will hold and manage the holdings of exchange-traded funds and mutual funds. The bank will handle inflows and outflows, make distributions, and handle the fund accounting. Bank of New York also owns Pershing, which is the entity that clears U.S. bond trades.
In 2021, Bank of New York earned 84% of its revenue from fee income, with the rest coming from interest income. This means that it bears less credit risk (which will go up in the event of a market crash and recession) than its competitors. When interest rates fall, Bank of New York will suffer somewhat in that it will be forced to waive fee income on its money market funds, but this is highly preferable to writing down bad debt. Bank of New York currently pays a 3.5% dividend yield and is trading at 7.3 times expected 2023 earnings per share.
3. Procter & Gamble: Whatever the state of the economy, people still buy paper towels and shampoo
Proctor & Gamble (PG 1.66%) is the classic defensive stock. It has a massive portfolio of consumer brands known throughout the world, including Tide laundry detergent, Pampers diapers, Head and Shoulders shampoo, and more. The common thread for these brands is that they are highly defensive. Even if the market crashes and the economy goes into a recession, people will still need paper towels and dishwasher soap.
As a defensive stock, Proctor & Gamble is a sleep-at-night stock, not one that is going to double in value in a short period of time. It is meant to be a safe haven, and it makes sense for more conservative investors like income investors and retirees. The stock is trading at 23.6 times expected 2023 earnings per share and has a dividend yield of 2.5%.