How to Profit From a Recession-Resistant Industry

Editor's note: This Weekend Edition, we're taking a break from our usual fare to share an essay adapted from our corporate affiliate TradeSmith. In it, CEO Keith Kaplan explains why an "economic moat" is the key to a company's success – no matter what the market is doing. He also shares a stock that's a smart way to bet on a recession-resistant sector today.

Twenty-seven years ago, Warren Buffett shared a piece of his investing strategy at one of his annual Berkshire Hathaway shareholder meetings.

Not only is it still relevant today, but it could be the most important investing advice to take in during sky-high inflation and a looming recession. Here it is...

We're trying to find a business with a wide and long-lasting moat around it – protecting a terrific economic castle...

What we're trying to find is a business that, for one reason or another – it can be because it's the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers' mind, it can be because of a technological advantage, or any kind of reason at all – it has this moat around it.

Like a protective waterway, "economic moats" shield a company's profits and market share. On top of that, they can act as a source of growth.

For those moats to exist, as Buffett stated, the company must build a unique advantage over its competitors.

One of those advantages can be high switching costs. Companies in the defense sector are a great example of this... It's not like a government can change who it buys fighter jets from overnight.

Those companies are making money in the here and now. And many of them can pass on part of their profits to shareholders as dividend payouts.

In an unpredictable economy, owning strong, recession-resistant stocks is more critical than ever...

Today, we're sharing a quick snapshot of one defense stock that fits the bill. This company has a strong moat – and solid potential in this market environment...

In the defense sector, Northrop Grumman (NOC) offers a little bit of everything, including building and supporting aircraft, spacecraft, advanced naval systems, and cybersecurity operations.

In the chart below, you can see what Northrop Grumman's 2021 sales breakdown looked like. Most of its customers are branches of the U.S. armed forces...

Again, the defense field already has a significant barrier to entry for competitors. What differentiates Northrop Grumman from other defense contractors, though, is its focus on space.

The company has been expanding its aerospace division since it acquired private spacecraft company Orbital ATK in 2018. And today, that slice of Northrop's business accounts for 30% of its sales.

Remember that eerie image of a star-filled universe that went viral in July?

That was taken by the James Webb Space Telescope – a product Northrop Grumman produced for NASA. The telescope is currently 1 million miles away from Earth and will spend another 10 years taking photos in outer space, during which time Northrop plans to widen its lead in aerospace innovation.

Selling a product this valuable is an incredible moat.

It's clear this company has a profound edge. Our TradeSmith tools are also highlighting its potential right now...

This stock is currently in the "Green Zone"... And notably, even in this environment, it has been there for most of the year. (This is our "buy mode" indicator. It means an asset is safe to consider because it's trading within its normal volatility range.)

When looking at the Volatility Quotients – another one of our proprietary tools – this company is also at a reasonable risk level. The Volatility Quotient is how our system calculates the most optimal time to sell a stock, based on volatility. Right now, that stop is at about 20% from Northrop's highs.

Our system goes so far as to give this stock a "Strong Bullish" rating. Take a look...

Northrop Grumman has a smaller yield of about 1.4%. So it may not be the best candidate if your top priority is income.

But if you're looking for an investment that can survive what this bear market throws at you, with long-term upside potential, this defense stock is worth a close look today.

Good investing,

Keith Kaplan

Editor's note: This year has been brutal for stocks and bonds... But this wild market likely isn't done with us yet. You see, Keith says a set of alerts from this system is warning of a major shift in stocks. TradeSmith's alerts warned him about the COVID-induced market crash... and the bear market that followed. And now, the system is signaling an opportunity to protect your wealth before the end of 2022... Click here for all the details.