Investors concerned about how the economic distress we will see play out over the coming quarters will impact their portfolios are increasingly choosing to re-balance out of highly cyclical sectors into defensive ones.
While many, including myself, have been harping on the need for this re-balancing prior to the pandemic, “better late than never” certainly holds true.
Consumer spending in the U.S. fell by the most on record in April, indicating a shift away from consumer discretionary spending and toward consumer staples.
For those heavily exposed to consumer discretionary stocks, I certainly recommend a deep dive into the fundamentals of such stocks and reconsider adding to any positions until the dust settles.
Refocusing one's portfolio to stocks with the highest quality balance sheets, regardless of the sector said stocks are in, is of utmost importance today. That said, I expect we'll see additional balance sheet impairments among consumer discretionary stocks in the near term as we see this economic weakness play out.
The Canadian stock that I would recommend investors look to as an example of a company to avoid right now and the consumer discretionary space is BRP Inc. (TSX:DOO).
This company sells various high-end recreational vehicles to consumers, and I've seen sales steadily climb during this recent bull market. As a global economic environment continues to deteriorate, I expect the first companies to see significant balance sheet issues will be those like BRP.
Invest wisely, my friends.
