17 Investments Which Will Thrive During Deflation
With deflation, there will be numerous vulnerabilities; stocks, commodities, real estate, employment income. However, the economic situation opens up some tremendous opportunities. Some of us will actually end up in a much better position than before the troubles began.
Technology has shown a historical indifference to both inflation and deflation. This fact is partially based on the speed of adoption of new disruptive products, which is often so strong that the direction of the broader economy has little impact on their sales.
Materials costs for hard products will decrease during deflation, bringing production expenses down. Meanwhile, the profit margins are so high on virtual products that businesses will easily be able to sell their wares for lower prices as required.
In addition, technologies which increase operating efficiencies for other businesses, or help corporations lower their costs, will be in high demand. Some examples of low-priced, high-quality stocks in the technology arena which will do well during deflation include:
Magal Security Systems (MAGS)
Magal provides site management, safety and security solutions, and intelligence gathering. The right access network in sensitive or protected areas saves time, money, and lives.
AWRE provides software and services for the biometrics industry. Government and commercial customers can authenticate people through Aware’s applications, and Aware owns a share of what is and will continue to be a growing market.
Yangaroo (YOO on Toronto Stock Exchange / YOOIF on Pink Sheets)
This digital media distribution company has cornered a growing market, has very high profit margins, and boasts a growth rate of over 40%. Most importantly, YOO helps their customers save money and become more efficient. Their clients include Burger King, Bud Light, MTV, XBox, Honda, Old Navy, and more.
These examples may give you an idea of the types of technology businesses which would be more insulated against deflation. Look for small companies whose growth will greatly outpace the potential shrinkage of the economy.
Most stocks fall during deflation, and this current period will be no exception. Betting against the markets should be a good move in such a circumstance.
One way to do this is through inverse exchange traded funds (ETFs), which are typically meant to act in opposite fashion to the underlying investments. Personally, I do not like ETFs, because they have management costs built in, and suffer “slippage,” whereby you lose small fractions over time. Due to this, most ETFs are not appropriate for long term time horizons.
For example, the market goes down 10%, but your ETF only increases 9%.
However, when the market goes up 10%, you lose a full 10%.
Some popular inverse ETFs include:
• Short QQQ (PSQ)
• Short Russell 2000 (RWM)
• Short S&P 500 (SH)
• Short Dow 30 (DOG)
During deflation, you may benefit by owning shares which make dividend payments. The reliable cash influx would be helpful, as long as the company does not lower their payouts at some point, and your time horizon is long enough.
While the value of assets decreases during deflation, having a source of incoming cash will allow you security, income, and the ability to take advantage of opportunities. As long as the dividend payment amounts remain constant, the activity of the underlying shares becomes less significant.
Most of the major corporations on the major markets pay dividends. Have a bias towards those with long histories of consistent or increasing pay-outs, such as:
• Coca-Cola (KO)
• American States Water Company (AWR)
• General Electric (GE)
• Colgate-Palmolive (CL)
Cost Saving Solutions:
We touched on this in the comments about technology, but regardless of industry, ANY business which can provide cost savings to other companies will be in demand. Whether or not their stock increases is another matter, but their operations should grow, and they will survive well throughout any deflationary period.
Zix Corporation (ZIXI)
ZIXI provides e-mail encryption and data loss prevention solutions, which reduces workflow friction and cuts down deployment time from months to hours.
Digital Turbine (APPS)
APPS provides mobile content solutions which manage and monetize the user experience. Among various aspects of the business, they also have a worldwide user acquisition network, and an app discovery tool.
WidePoint provides products and services which focus on information technology. The company offers solutions for expense management, identity verification, and order tracking.
Producing Gold Miners:
Contrary to popular belief, gold prices often perform well during deflationary periods (but not always). The price drivers for gold are not necessarily inflation or deflation, but rather tied to events such as economic weakness, global instability, declining currency values, and a loss of confidence in the dollar.
Recent global demand for gold is strong as we enter the current deflationary period, as evidenced by some massive purchases by various central banks. The World Gold Council has reported that several nations, especially Russia and China, have been buying, with a net 175 tonnes being acquired in the 3rd quarter alone.
Many small gold production companies will stand to benefit from any increases in the price of the metal. After the weak performance of most commodity stocks over the last year, the miners are oversold, and represent very compelling valuations.
Three small companies we believe will do very well through the current deflationary period, especially if we see higher gold prices, are all producers (as opposed to explorers). Each of the three has operations in promising and politically/militarily friendly nations:
• Hecla Mining (HL)
• Eldorado Gold, (EGO)
• NovaGold (NG)
With any business you should look into their financial position before you invest, but during a deflationary period specific items are even more relevant:
• Low debt loads: This allows for more operational versatility. Since they have room to take on loans as needed, they will be able to take advantage of troubled companies and purchase undervalued assets which typically present themselves during deflationary periods.
• Strong cash position: Cash is king, and when banking institutions feel deflationary pressures, they may be overly cautious and/or stringent with making capital available. In times of deflation, the ability to bypass the banks will be a luxury.
• Weather the storm: Some corporations have a better ability to survive through the lean years. Businesses with high profit margins, or those with low costs of production, will have a better chance of emerging from deflation in good shape. For some companies, the costs of supplies to assemble their products will actually drop in cost during deflation, thus allowing for reduced expenses.
Disclosure: Peter Leeds owns shares and warrants in YOO. He has no plans to sell anytime within the next 6 months. As well, MAGS, AWRE, ZIXI, APPS, WYY, HL, EGO, and NG were profiled within the last 12 months to subscribers of the Peter Leeds Stock Picks newsletter at peterleeds.com.