As people become more jumpy when it comes to the market, I decided to take it upon myself to build a screen that we could use in order to protect ourselves in the event that we do enter another recessionary period. Now, I want it to be known that I don’t necessarily believe that another recession is imminent; rather, I just like being prepared for any situation.
Sadly, there are only two recessions over the past 20 years, so we don’t have a ton of data to work with which results in a lot of guesswork and relying on fundamental factors to find companies that are secure rather than trading via speculation.
- The company must have a Value Score, a proprietary Equities Lab score, of greater than 6
- The Earnings per share must be higher than the dividend offered
- The company must have trading activity
- The company must be decreasing their shares outstanding over the past 80 days
- The company must be ranked in the top 90% of companies based on how much their share price increased over the past year
- The P/E must be between 0 and 10
Basically this editor looks for companies that have value and, when looking purely at the numbers, are trading at a “discount”.
So, how does the screen do?
As you can see, during the crash resulting from the .com boom, this strategy made 53%, while the market fell.
The only other recession time that this strategy trades in is the 2008 depression, and during that time the strategy didn’t make or lose money. It ended the recession at exactly the same place it went in with, which I can’t complain about. Now, I have the limit for jumping into this strategy set incredibly low to make sure that I catch recessions at the right time – even if they are false alarms like 2006 where the market became slightly wobbly before continuing up.
When to Start Using this Strategy
There is a lot that goes into figuring out when a recession might happen. As a result, we can never really know when the next big crash is going to happen. This investment strategy is based on a recession probability that is calculated by the Federal Reserve.
The screen finds stocks to invest in whenever the recession probability goes above 2.3, allowing the strategy to begin investing at the peaks in both 2000 and 2008.
I may not necessarily believe that a recession is coming in the near future, but, like everyone else, I have my doubts that this bull market is going to continue running at this pace. So, I feel like it would be irresponsible if I didn’t at least take minor precautions to protect my investments as well as the investments of our clients.