If we look closely, robustness isn’t exactly the opposite of fragility as we think! There’s a better term to describe the opposite of ‘fragility,’ which also helps us understand the secret to making a stock recession-proof. The term you are looking for is anti-fragility.
Former trader, hedge fund manager, and professor, Nassim Nicholas Taleb, came up with the term “anti-fragility” in his book “Antifragile: Things That Gain from Disorder.” Taleb came up with such a term because he thought that other words used as opposite of ‘fragility’ were not accurate.
What is Anti-Fragility?
Rather than establishing anti-fragility as a replacement of robustness or other terms implying the opposite of fragility, Taleb expanded its meaning. Anti-fragility actually refers to the capability of withstanding a shock as well as achieving improvements due to the shock. Therefore, one can clearly note that an anti-fragile stock, in its literal meaning, has the capability to withstand the shock of a receding economy as well as performing exceptionally well under pressure. Anti-fragile stocks perform and grow well with exposure to volatility, stressors, disorder, uncertainty, and randomness. Let us reflect on the example of Wal-Mart, whose rare ‘anti-fragile’ stock nearly always goes up in a market crash.
Wal-Mart (WMT) enjoys the reputation of being one of the unique stocks on Wall Street for its distinct behavior in response to specific market environments. Wal-Mart is currently running almost 10,957 stores worldwide, with annual revenues amounting to $476 billion. WMT stocks are referred to as recession-proof stock due to the immunity of its sales and revenues to any type of economic disruption. Most important of all, the discount products of Wal-Mart are in high demand during tough economic situations. A closer look at the performance of WMT during the 2008-2009 financial crisis and the underlying motivators for the same can help in understanding how WMT stocks are anti-fragile.
How Anti-fragile Was Wal-Mart Stock in 2008-2009?
A direct comparison of the stock prices of WMT to establish the anti-fragility of WMT stocks might be the first solution that comes to mind. However, a reflection on the company’s revenues over the years can clearly depict the organization’s performance in response to the recession. Just when the recession started in 2007, Wal-Mart reported a growth of 10%. As the recession worsened in the coming years, Wal-Mart depicted growths of 9% and 7% in 2008 and 2009, respectively. The dip in growth in 2009 directly reflects on the period when recovery kicked in, and customers had the privilege of spending elsewhere and use their additional disposable income for purchasing luxury items.
2007-09 was no exception either. If we expand the data across the past five recessions (1980, 1981–1982, 1990–1991, 2001, and 2007–2009). actually gained an average of 42.4% during those periods.
Crucial Reasons for Wal-Mart’s Anti-Fragility
The anti-fragility of WMT stocks goes beyond mere stock performance or revenue growth details. Wal-Mart generally sells cheaper goods (in terms of price), thereby increasing their demand when customers have a lower income. Generally, in a recession period, consumers have less income, and their expenditure decreases. So, WMT stocks show exceptional behavior by slightly underperforming in a booming economy while experiencing growth during a recession. In addition to the limitations of customer’s income, there are many other factors that provide substantial proof of anti-fragility in WMT stocks. The most prominent factors that drive the performance of WMT stocks in a recession are the company’s size, and economies of scale.
Income investors will also like WMT’s payouts. The 1.81% yield may not seem sexy in comparison to other sectors, but it’s the consistency which makes it a great dividend stock. The company has increased payouts since it’s IPO in 1975. That’s 44 years of rewarding shareholders, even through recessions. It’s payout ratio (total dividends paid as a percentage of net income) is still a sustainable 44.1%.
Reaching Out to Customers by Solving a Pain Point
90% of Americans live at a distance of 15 minutes from a Wal-Mart location. However, the response of Wal-Mart in the ongoing COVID-19 pandemic will be crucial for holding its ship steady in rough seas. Wal-Mart’s curbside pickup program is the most interesting intervention that continues to improve the performance of its stocks. With the measures for social distancing being mandatory as a response to the global COVID-19 outbreak, crowding in grocery stores is a notable pain point for customers. Therefore, Wal-Mart leverages its existing positioning in the market for promoting its curbside pickup service as a flexible instrument for serving its customers. Customers can place their orders through the Wal-Mart website or app and pick up their order from the designated parking area at a specified time.
The simplicity of the curbside pickup program is the foremost factor for driving its success. The reduction of traffic at Wal-Mart stores allows employees to stock the aisles and process all online orders effectively. Most important of all, the success of the curbside pickup program is primarily evident in the protection for customers from any concerns of COVID-19 infection.
Therefore, we noticed how Wal-Mart capitalizes on the two most important traits of customer behavior in an economic recession for keeping its stocks ‘anti-fragile’. The key to Wal-Mart’s anti-fragile stock’s performance is the lower prices of its products, the type of products it sells, and positioned closer to the customer. Therefore, Wal-Mart is one of the very few stocks we’re bullish on in this period of crisis during COVID-19 and in the long-term after the crisis ends.