What makes a business a "necessary evil"?

A necessary evil business provides services or products that society requires to function properly, even if their operations can be controversial or have environmental impacts. Examples include waste management companies, chemical manufacturers, and energy infrastructure operators. These businesses are considered "necessary" because modern life depends on them, and they typically enjoy stable demand regardless of economic conditions.

Why would these stocks be considered defensive investments?

Defensive investments typically perform well during economic downturns because they provide products or services that remain in demand regardless of economic conditions. The companies in the Necessary Evils Portfolio offer essential services like waste management and critical chemicals that consumers and businesses need regardless of the economy. This inelastic demand can lead to more stable revenues and potentially more consistent performance during market volatility.

What are "economic moats" mentioned in the portfolio description?

An economic moat refers to a company's ability to maintain competitive advantages over its rivals, protecting its market share and profitability over time. For the companies in this portfolio, moats come from high barriers to entry (expensive infrastructure, regulatory licenses), specialized expertise in handling hazardous materials, and entrenched relationships with municipalities and industrial clients. These advantages make it difficult for new competitors to challenge established players.

How do regulatory complexities benefit these companies?

While regulations might seem like burdens, for established companies in sectors like waste management and chemicals, they can actually strengthen their market position. Complex regulations require specialized knowledge, compliance systems, and infrastructure that are expensive to develop. This creates barriers that make it harder for new competitors to enter the market. Additionally, as regulations tighten, smaller competitors may struggle to adapt, potentially allowing larger, more established companies to gain market share.

What is inelastic demand and why does it matter for investors?

Inelastic demand means that consumers continue to purchase a product or service regardless of price changes, because they consider it essential. For investors, companies with inelastic demand (like those in waste management or providing critical chemicals) can potentially maintain stable revenues even during economic downturns. This characteristic can make these stocks less volatile than companies selling discretionary products, potentially providing more predictable cash flows and serving as portfolio stabilizers during market turbulence.

15 handpicked stocks

Necessary Evils Portfolio

These companies provide the essential infrastructure and services our society can't function without, even if they're not always popular. Carefully selected by our analysts, these stocks offer defensive stability thanks to their non-negotiable role in the global economy.

Han Tan | Market Analyst

Updated 2 days ago | Published at juin 17