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How to Correctly Invest in a Downturn

Written by: Gary Ashton

As the Coronavirus crisis rolls on, US economists are quickly revising down their GDP growth expectations. For example, economists expect 1Q to contract 5% and 2Q to contract between 15-30%. US jobless claims last week revealed another 6 million Americans filed for unemployment benefits. Equity markets are already pricing in this downturn. The S&P 500 index is down 23% in 2020. Such unprecedented volatility can make investing extremely difficult. Investors need to pick reliable and well-positioned names to weather the coming economic downturn. Finscreener.com can help. Investors can use the Financial Strength Screener to identify companies that are best positioned to weather the storm. To keep things simple, we will use the S&P 500 equity index as an example.

Large Cap Better than Small Cap

In stormy seas, it is better to be on a large boat than a small one. In turbulence, a larger aircraft can smooth through the bumps better than a small plane that gets blown about. The same rule applies to investing in rough markets. Large capitalized companies tend to weather the downturns better than smaller firms with unproven business models or a short track record. We use Finscreener.com’s stock screener to identify large and mega-cap stocks. To do this, simply click on “market cap” at the top of the screener and select large and mega-cap in the tick box. Applying this filter reduces our investment universe to 349 stocks from 505.

Staples Better than Cyclicals

The next step is to whittle down our 349 stocks because this is still too many names to analyze correctly. When times get tough, people continue to buy essential household products and tend to delay buying things like a new dishwasher. For that reason, it may be best to filter down our list to names that sell essential products. To do this, click on the sector at the top and select “consumer defensive” in the drop-down box. This step reduces our stock list to 32 from 349, which is already a more manageable number.

Financial Strength Screener

The final step is to pick the best-positioned stocks of the remaining 32 names. To do this, we will use the Financial Strength Screener. This screen is located second from the left in the second row below the Stock Screener title and is displayed in blue font. Choosing Financial Strength Screener gives six different financial metrics to choose from, but today we will focus on just two of them – the leverage ratio and the current ratio.

The leverage ratio is a measure of how much debt a company has on its balance sheet. A high leverage ratio can lead to bankruptcy, especially in an economic downturn. The current ratio is a comparison of current assets to current liabilities. Companies with a low current ratio could face problems meeting short term payment obligations, which is also a red flag.

Applying a leverage ratio of 0x to 2x and a current ratio of at least 1x gives us two names to consider: Hormel Foods (NYSE: HRL) and Monster Beverage (NASDAQ: MNST). Hormel is up 7.24% in 2020, demonstrating its defensive, counter-cyclical properties. The Financial Strength Screener is just one example of how Finscreener.com can help you make better investments.

Related: Why Hasn’t Bitcoin Spiked in the Financial Crisis?

DISCLOSURE:The views and opinions expressed in this article are those of the contributor, and do not represent the views of iris.xyz. Readers should not consider statements made by the contributor as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please click here.