The share price of Coles Group Ltd [ASX:COL] has been on a solid run since hitting a 52-week low of $11.12 on 21 February.
Before market open today, the grocery giant was only 29 cents shy of its 52-week high, sitting at $13.83 a share. This means their shares are up over 24% from their 52-week low.
With the next results update scheduled for 22 August, it seems a good time to look at what could be driving this trend.
Coles share price telling us groceries don’t go out of fashion
At the end of the day, it’s hard to imagine a world where Coles — or other major supermarket chains like Aldi and Woolworths Group Ltd [ASX:WOW] — won’t have any customers.
That’s because these businesses stock and sell necessities, not luxuries. And in an economic downturn, it’s the luxuries that are lost in order to afford the necessities.
This makes Coles a non-cyclical stock, as its performance doesn’t tend to fluctuate with the state of the economy. In fact, these stocks tend to outperform the market during economic slowdowns, which is why investors tend to flock to them when there are signs of a downturn.
Think about it, no matter how bad the economy is, we’ll never stop buying groceries.
We brought this up last month here at Money Morning when Coles released their trading update. We pondered whether an RBA rate cut could impact investor interest.
Since then, the cuts have come.
Banking on a downturn
The RBA has slashed interest rates to an historic low of 1%, trying to mitigate rising unemployment and a slowing economy.
Yet Coles shares are still on the increase, as is Woolies, with investors understanding these non-cyclical stocks are more immune to lower levels of consumer spending.
Note, however, that we said more immune, not entirely immune.
Ultimately, no matter how necessary consumer staples (like groceries) are, less cash in the bank means less items can be bought. And seeing as 60% of the Aussie economy relates to consumer spending, a slowdown in this means all discretionary retailers will feel a pinch.
Thanks to these rate cuts, if you’re looking to build a strong income portfolio in 2019, you may be facing an uphill battle. We have a free report on the ‘Top Five Dividend Stocks for 2019’ to help you pocket some potential payers as the slow-down approaches. Download now.
For Money Morning