Last Friday, I authored Dividend Aristocrat Performance During Financial Crisis. That article looked at the performance of stocks that were part of the Dividend Aristocrat Index (NOBL) of companies that have paid increasing dividends for twenty-five years. That strategy has tended to be defensive during broad market sell-offs. In this article, however, I wanted to expand the study to include all of the S&P 500 (VOO) constituents.

In the table below, I have listed the best performing decile of the S&P 500 from the then market peak of 1565 on October 9th, 2007 through the cycle nadir at 676 on March 9th, 2009. These 50 companies were best able to ride out the historic drawdown in stocks that occurred over that seventeen month period.

The first list looks at stocks that were constituents at the market trough on March 9th, 2009, and ranks them by trailing return from the market peak.

The second list includes current S&P 500 constituents, and ranks them by realized returns over that historic drawdown. Out goes Rohm & Haas, which was acquired by Dow Chemical (DOW) during the downturn. In comes Netflix (NFLX), which delivered strong returns through the crisis, but was not actually a member of the S&P 500 until late 2010.

There are some notable themes from these lists.

  • Companies that may be viewed as provisioners of inferior goods - those goods whose demand rises as income falls - like WalMart (WMT), McDonald's (MCD), Family Dollar Stores (FDO), DollarTree (DLTR), TJX Companies (TJX), Ross Stores (ROST) and Spam-maker Hormel (HRL) all were well represented. Similarly, do-it-yourself automotive chains like O'Reilly Automotive (ORLY), AutoZone (AZO), and Advanced Auto Parts (AAP) were high on the list of performers.
  • Financials are notably under-represented. Given the stress on the banking sector and financial system more broadly, only one financial made the list - current Dividend Aristocrat, People's United Financial (PBCT), a Connecticut-based bank serving the Northeast that successfully expanded during the crisis.
  • Health Care (XLV), was the most frequently represented sector on both lists, but one has to question whether health care as a percentage of gross domestic product is hitting societal upper bounds given the concern over drug pricing and healthcare costs from both sides of the aisle. We may find that Health Care companies do not provide the same portfolio ballast in future stress environments.
  • Utilities (XLU) and consumer staples (XLP) were naturally well-represented given their defensive business models.
  • Energy (XLE) was surprisingly well-represented as well. Oil surged into mid-2008, hitting $145 barrel that summer before collapsing. Companies at the forefront of the shale revolution are listed frequently on this list of top performers. That industry may have been too successful, increasing domestic supply as demand was secularly challenged by efforts to curtain fossil fuel emissions.
  • There is naturally some level of consolidation during a downturn as companies with balance sheet capacity look to acquire competitors or adjacent businesses that have gotten cheaper. Getting these M&A calls right during the last downturn would have certainly boosted performance.

This is another piece where my curiosity simply led to the creation of an article. I wanted to see these lists of top performers as a reality check on the sectors and themes that perform in down markets, and am sharing them with the Seeking Alpha community. While I continue to believe that a strong domestic consumer can buoy the current economy, it is never too early for investors to think about what strategies might produce lower drawdowns in an economic contraction.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance and investment horizon.

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