The appeal of growing businesses is easy to understand. But what happens when the economy stops growing? Can businesses still do well? Some can. Here are three growth shares I think could possibly prosper in a recession.
Netflix
The investor jury has been out on Netflix (NASDAQ: NFLX). The streaming service has spent heavily on expensive content, meaning it has a high cost base. But there are signs that consumers tightening their belts is leading to some cancelling their subscriptions. Could a recession badly hurt revenues and profitability?
I see a risk that it could. But things may go the other way too. As people cut back spending on nights out and restaurant dinners, the allure of home entertainment might actually grow.
I also think a recession could help Netflix sharpen its business model. One challenge it faces is how to price its service for markets where incomes are lower than in developed countries. Cracking that problem could open up huge new opportunities for the firm. A recession in existing markets will help the company understand the limits of its pricing power in minute detail. I reckon it could use that data to figure out the optimal pricing models to help boost sales globally.
I see Netflix as among the growth shares that could do well in a recession. I would consider adding more to my portfolio.
Begbies Traynor
A different logic applies to Begbies Traynor (LSE: BEG).
The restructuring specialist is already in growth mode. Revenues have more than doubled in the past four years. Unfortunately a recession would likely cause a lot of businesses to struggle. That could provide more opportunities for Begbies Traynor.
The company has been raising its dividend annually and yields 2.5%.
One risk here is profitability. Last year the company made a loss. In general, its profit margins are slim.
Yet I think this growth stock could do well in a recession as business would likely expand. But the profit margin is not consistently attractive enough for me to add the shares to my portfolio at the moment.
B&M
The growth story at discount retailer B&M (LSE: BME) has been very strong for the past few years. But has it now fizzled out? After all, both revenue and profits dipped slightly last year.
I see that as a pause for breath after the retail chain had grown so strongly over the previous few years. Discounters tend to do well when the economy does badly. Shoppers watching their pennies can mean they attract new customers. And existing shoppers may choose to spend a higher percentage of their weekly budget in stores like B&M than costlier rivals.
A change in management is a risk to profits though, if the new chief executive cannot keep a tight lid on costs. That has been a key part of the chain’s recipe for success so far. But B&M is now well-established and benefits from a strong customer following. I think its price focus could help it grow as a business in coming years.
This growth shares is down 28% in the past year. I see that as a buying opportunity for my portfolio.