Some experts believe there won’t be a downturn in 2021 due to President Joe Biden’s $1.9 trillion in fiscal stimulus. However, others argue that long-term unemployment is approaching a record. For those who believe the latter rather than the former, you might want some recession-proof stocks to buy just in case.
In May 2018, I discussed three recession-resistant stocks that I thought would do well in the case of a downturn. They were Church & Dwight (NYSE:CHD), DollarTree (NASDAQ:DLTR), and Flowers Foods (NYSE:FLO). All three of these stocks did well during one or both of the 2001 and 2008 recessions.
Since then, the three stocks appreciated by 68%, 4%, and 11%, respectively, over 33 months. By comparison, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) generated a 33% return over the same period.
Clearly, we didn’t hit recession territory until well into the pandemic. And, if I’d just gone with Dollar General (NYSE:DG) instead of DollarTree, my average return would have been 58%, not 28%.
Live and learn, I guess.
Using the Consumer Staples Select Sector SPDR (NYSEARCA:XLP) and the Technology Select Sector SPDR (NYSEARCA:XLK), I’ll come up with seven recession-proof stocks to buy:
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You’re probably wondering about my first selection.
While Apple might have almost $77 billion in cash, it’s added a lot of debt since the 2008 recession. In 2008 and 2009, Apple didn’t have any long-term debt, along with $24.5 billion and $34.0 billion, respectively, in cash. Today, Apple has $112 billion in total debt, or 32% of its total assets.
Should consumers find themselves low on cash, big-ticket purchases like a new iPhone probably go right out the window? Well, that’s the standard opinion.
However, in the last three months of calendar 2008, Apple recorded record revenue of $10.2 billion, selling more than 2.5 million Macs and 4.3 million iPhones. While the iPhone was in the early stages of its overall growth, it was obvious even back then that the smartphone had become its future growth driver.
Chief Executive Officer Tim Cook has wisely built a massive services business to add some balance to the company’s top-and bottom-lines. In Q1 2021, Apple’s gross margins from its services business increased 400 basis points to 68.4% while growing the top line by 24% over last year.
With Apple’s 5G iPhones coming, it probably seems silly to be talking about recession-resistant stocks. Still, when the economy softens, you’ll want to own shares of quality companies because those stocks will have the best chance of maintaining their share prices in a market correction.
Well-run companies never go out of style.
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It’s been 11 years since Microsoft launched Azure, the software company’s foray into cloud computing. The company’s commercial cloud business generated $44 billion in revenue in fiscal 2020. In 2015, it was less than $6 billion.
In fiscal 2009, Microsoft saw its annual revenue drop by $2 billion (-3.4%) to $58.4 billion, its first-ever year-over-year decline. As a result, its operating income fell by 9% to $20.4 billion.
Imagine owning a business that had 35% operating margins in a bad year. That’s my idea of a recession-resistant business.
Fast forward to today. It has a 39% operating margin from $153 billion in trailing 12-month revenue. CEO Satya Nadella really has the company humming.
In the second decade of its existence, it’s hard to imagine Microsoft without Azure. I’m sure we’ll be saying the same thing about another yet-to-be-determined product in 2031.
Interestingly, Microsoft has net cash of $62.6 billion, a number that even puts Apple to shame.
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One of my better predictions in 202o was that Adobe’s stock would hit $400 in 2020. That was in early February. It hit the target five months later, getting as high as $537.88 in September before settling into a tight range between $460 and $500.
So, where to next?
While I won’t make a prediction, I will say that should a recession hit, Adobe’s products will remain in demand because life goes on. PDFs don’t go out of style. Nor does the rest of its product line, including Photoshop, used by approximately 90% of creative professionals.
In 2020, it had record revenue of $12.9 billion, 15% higher than in 2019. On the bottom line, it had an operating income of $1.2 billion, 30% higher than a year earlier. In 2020, it generated $5.7 billion in operating cash flow, enabling it to buy back $3 billion of its stock at an average price of $375 a share. That’s a 23% return on its investment despite the $25 correction year to date.
The advent of the cloud has made Adobe even more essential in 2021.
This year, Adobe expects to grow sales by 18% to $15.2 billion, with non-GAAP earnings of $11.20 per share. At 41 times 2021 earnings, it’s not cheap.
Five years from now, you won’t regret having bought ADBE stock.
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Just as I included Church & Dwight in my 2018 article about recession-resistant stocks, Procter & Gamble is the quintessential consumer staples stock. Defensive in nature, it’s managing to make hay while the sun shines.
It is growing its business at a time where many companies are finding it difficult to prosper. That’s because a lot of its products aren’t things most people will go without — recession or not.
Of the company’s 22 billion-dollar brands, I use 10 of them daily or weekly. That’s not going to change in a recession. The same can be said for most people who hold down a decent-paying job.
How did P&G do during the 2008 financial crisis?
Well, leading up to the recession, the company raised prices to fight inflationary pressures in Europe. By Spring 2009, inflation had stopped rising, so it lowered prices. However, it gained approximately $1.4 billion in additional sales from those increases.
Post-recession, the company put into place a plan that would see it introduce cheaper products in markets where consumers couldn’t pay premium prices while keeping prices of many of its billion-dollar brands higher than average.
In 2009, it generated $9.9 billion in free cash flow (FCF) from $76.7 billion in sales. In 2020, it had adjusted FCF of $14.9 billion from $71.0 billion, an 810 basis point improvement in its FCF margin.
Whatever happens in the next recession, P&G will be ready.
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When the last recession hit in 2008, Walmart didn’t have the e-commerce infrastructure it has today. That’s made a big difference in its ability to fight through the pandemic.
Walmart reported its fourth-quarter results in mid-February. It missed the analyst estimate of $1.51 per share by 12 cents. Since delivering its results, WMT stock has lost 13% of its value through March 2.
According to Statista, Walmart had e-commerce sales of $36.9 billion in 2020. That’s approximately 6.6% of its overall revenue of $559.2 billion. In 2013, Walmart’s e-commerce sales were approximately $10 billion or 2.1% of its $476.3 billion in annual sales.
Walmart continues to grow its e-commerce sales at a brisk pace. In the fourth quarter, they were 69% higher than a year earlier. As the margins improve and e-commerce sales grow to represent 10% of its overall revenues, the online business will become a profit center for the company.
When the last recession hit, Walmart didn’t have much of an online business. Now it does. That will make a huge difference should economic times get really tough.
In the meantime, enjoy the fruits of its $20 billion share repurchase plan.
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During an economic recession, consumers tend to tighten the purse strings. No major purchases or major financial commitments. That said, it doesn’t mean the family wallet is shut completely with snacks and beverages very low on the priority list of spending cuts.
In the recession years of 2007 to 2009, PepsiCo stock had a high of $79.57 and a low of $45.81. At the low, its share price declined 42.4% from its high.
However, its earnings held their own, averaging almost 6% annual growth in 2008 through 2010. For those who care about dividends, PepsiCo increased its annual dividend payout from $1.35 in 2007 to $1.86 in 2010, a compound annual growth rate of 11.3%.
So, even though the company’s stock didn’t completely hold up during the recession, it managed to get back to its 2007-2009 high of $79.57 by March 2013.
To keep the company growing, PepsiCo is launching a line of cocktail mixers this month to meet the increased demand for at-home cocktails. Neon Zebra will come with four mixes: Margarita, Strawberry Daiquiri, Mojito, and Whiskey Sour.
Amazingly, the sale of cocktail mixers in the 12 months ended Feb. 13 rose by 36% to $305 million. It will be interesting to see what happens once the world returns to normal.
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Costco’s business model makes it one of the best retail stocks to own for the long haul. I did, however, recommend that investors buy a half position, waiting for it to correct over the next three to six months to buy the other half.
That time has come. Trading down more than 6% recently, COST stock is down 10% from Oct. 5, 2020, the date of my article, and almost 13% YTD.
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) vice-chairman Charlie Munger recently stated that Costco held a specific advantage over Amazon (NASDAQ:AMZN) when it comes to growing its business.
“Costco, I do think, has one thing that Amazon does not. People really trust Costco to be delivering enormous values,” Munger said Feb. 24. “That is why Costco presents some danger to Amazon — because they’ve got a better reputation for providing value than practically anybody including Amazon.”
Years ago, I can remember then CEO, Jim Sinegal, discussing Costco’s relentless push to get the best prices possible from its suppliers. However, it wasn’t to make more money. The move was intended to push prices lower for its customers, making the bulk of its profits from its satisfied members’ annual membership fees.
Nothing’s changed except that its sales are much higher.
In fiscal 2009, Costco had membership fees of $1.53 billion, or 2.2% of its annual revenue. In fiscal 2020, they were $3.54 billion, or 2.2% of revenue. That’s a compound annual growth rate of 7.9%.
As every year passes, Costco gets more recession-resistant, not less.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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