What No One Says About This 'Recession-Proof' Sector

Right now, you can't pass a newsstand without hitting an article touting the world's best "recession-proof" stocks.

 

These so-called defensive industries include groceries, cigarettes, and drugs. Supposedly, consumers will continue to spend on these items no matter the state of the economy. They may skip Cancun getaways and Coach handbags, but they won't cut insulin or heart meds. Maybe so...

 

But here's something you probably aren't hearing about: Patients will sacrifice a pricey brand-name drug for a cheap knock-off...

 

In fact, patients are already cutting back on drugs like Lipitor – Pfizer's cholesterol medication and the world's top-selling drug. They're switching to generic drugs that cost 30% as much.

 

For Big Pharma, this dose of bad news couldn't have come at a worse time. In 2009, the industry will face generic competition on products that currently bring in $10 billion a year.

 

The combination of looming patent expirations, lagging drug sales, and crummy market conditions has crushed Big Pharma stock prices. On average, the big drugmakers are down 25% on the year. Now they're yielding as much as 7.5%.

 

But as I warned you before, don't be tempted by Big Pharma's high yields. A protracted recession will dampen sales of the industry's top-selling products right up until these big brand-name drugs lose patent in 2010 and 2011. Big Pharma shares could fall another 20% from here. That would wipe out several years of dividends.

 

So if you're looking for recession-proof stocks, drugs are the right idea. But Big Pharma's not going to take good care of your cash. Instead, you should turn to major players in the generics industry. Teva Pharmaceuticals (TEVA), Mylan (MYL), and Watson Pharmaceuticals (WPI) are the biggest names.

 

Take a look at this one-year chart that compares Teva to my favorite whipping-boy, Pfizer (in blue):
 

 

Teva handily outperformed Pfizer as the market fell apart. Sure, Teva's down about 9% on the year. But compared to the S&P's 40% beating, that's not too shabby.

 

Few businesses look better than a company selling cheap drugs to an aging population during tough economic times. So double-check your portfolio. If you bought Pfizer or Merck hoping to wait out the recession, you'd be better off replacing it with a name like Teva.

 

Good investing,

 

Rob

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