In this article, we will look at 10 best recession stocks to buy according to Wells Fargo.
This June Wells Fargo unveiled its “Recession Stock Portfolio” right before the Fed issued its latest rate hike on June 16. The central bank hiked interest rates by another 75 basis points bringing its benchmark fund’s rate to a range between 1.5% and 1.75%, the highest it has been since 1994. Wells Fargo highlighted that according to the central bank’s data, at the end of 2021 roughly 24.3% of U.S. household assets were in equities. Wells Fargo estimates U.S. household assets to decline by $6 trillion in the second quarter of 2022, due to sell-offs. Chris Harvey, a senior analyst at Wells Fargo, said that once the economy is in a recession, the Fed is likely to ease its tight monetary policies. Harvey added:
“We are not looking for a level, but rather an event (or events) to stabilize equities. Stocks likely will find a bottom when the market believes Fed hikes will begin to decelerate. To get there, we will need to see jobless claims numbers continue to rise, suggesting supply/demand is better aligning and breakevens continue to decline (implying inflation expectations are abating). We believe this is still off in the distance.”
Wells Fargo is not the only bank that has been predicting a recession. On June 21, Goldman Sachs reported that it sees the probability of the U.S. economy entering a recession now as double that of its previous forecasts. Earlier this year, the bank estimated that the chance of a recession in the 12 months to follow was 15%. The bank raised its estimates to now 30%, citing two primary reasons for it. Firstly, Goldman Sachs cut its GDP growth expectations for the rest of 2022 and into 2023, following the central bank’s recent tightening. Secondly, Goldman Sachs expects the Fed to continue quantitative tightening in the months to come as inflation pressures persist.
According to major banks in the U.S., a recession is imminent, as inflationary pressures loom over the economy and Fed tightening continues. Investors are exploring stock options to recession-proof their portfolios. Wells Fargo released a list of 55 stocks that it believes can manage to hold up strong against a recession. Some prominent mentions in the list were Verizon Communications Inc. (NYSE:VZ), PepsiCo, Inc. (NYSE:PEP), 3M Company (NYSE:MMM), and International Business Machines Corporation (NYSE:IBM).
Our Methodology
To compile this list of 10 best recession stocks to buy according to Wells Fargo, we reviewed the bank’s recession stock portfolio that it released on June 14, 2022. We picked stocks from sectors that typically possess the ability to pass on higher costs to consumers, therefore maintaining profit margins. Such sectors include consumer staples, energy, and utilities among others. We narrowed down our selection to stocks that had consensus positive analyst sentiment and investor sentiment. The stocks are ranked in increasing order of hedge fund holders.
Best Recession Stocks to Buy According to Wells Fargo
10. Realty Income Corporation (NYSE:O)
Number of Hedge Fund Holders: 22
Realty Income Corporation (NYSE:O) was mentioned among Wells Fargo’s real estate stock picks for a recession. Realty Income Corporation (NYSE:O) is an attractive stock option for a recession because of the company’s successful track record of consistent monthly dividends. As of this June, Realty Income Corporation (NYSE:O) has consistently awarded its stakeholders with 624 monthly dividends since it went public in October 1994.
On June 16, Realty Income Corporation (NYSE:O) announced that the company has filed to sell $120 million worth of shares of its common stock. With this move, Realty Income Corporation (NYSE:O) expects to settle its debt and also allocate capital to expand its portfolio of properties.
On May 4, Realty Income Corporation (NYSE:O) announced earnings for the fiscal first quarter of 2022. The company reported an FFO of $1.01 and exceeded expectations by $0.04. Moreover, the company’s revenue was valued at $807.34 million, up 93.29% year over year, and outperformed Wall Street consensus by $58.66 million.
Insider Monkey found 22 hedge funds long Realty Income Corporation (NYSE:O) at the end of Q1 2022. These funds held collective stakes worth $284.88 million in the company. Of these, Glendon Capital Management was the most prominent investor in the company, owning over 1.85 million shares which amount to a stake of $128.68 million.
In addition to Verizon Communications Inc. (NYSE:VZ), PepsiCo, Inc. (NYSE:PEP), 3M Company (NYSE:MMM), and International Business Machines Corporation (NYSE:IBM), Realty Income Corporation (NYSE:O) is also a recession-proof stock to invest in according to Wells Fargo.
9. DTE Energy Company (NYSE:DTE)
Number of Hedge Fund Holders: 28
On April 28, DTE Energy Company (NYSE:DTE) released earnings for the first quarter of fiscal year 2022. The company reported earnings per share of $2.31 and exceeded expectations by $0.23. The company’s revenue for the quarter came in at $4.58 billion, up 21.15% year over year, and ahead of expectations by $1.04 billion. DTE Energy Company (NYSE:DTE) was among Wells Fargo’s top utility stock picks for a recession.
As of June 22, DTE Energy Company (NYSE:DTE) has a forward dividend yield of 3.06% and has gained 3.71% over the past twelve months. On May 23, Citi analyst Ryan Levine raised his price target on DTE Energy Company (NYSE:DTE) to $146 from $134 and maintained a Buy rating on the shares.
At the close of Q1 2022, 28 hedge funds held stakes in DTE Energy Company (NYSE:DTE) worth $482.27 million. Of these, Millennium Management was the most prominent shareholder in the company with stakes worth $139.73 million, up 28% from the fund’s Q4 2021 stakes.
DTE Energy Company (NYSE:DTE) is a top recession stock to buy according to Wells Fargo. Other stocks that made it to the bank’s recession stock portfolio were Verizon Communications Inc. (NYSE:VZ), PepsiCo, Inc. (NYSE:PEP), 3M Company (NYSE:MMM), and International Business Machines Corporation (NYSE:IBM).
8. Marathon Petroleum Corporation (NYSE:MPC)
Number of Hedge Fund Holders: 43
Wells Fargo named Marathon Petroleum Corporation (NYSE:MPC) among its top energy stock picks for a recession. On June 14, Wells Fargo analyst Roger Read raised his price target on Marathon Petroleum Corporation (NYSE:MPC) to $129 from $117 and reiterated an Overweight rating, equivalent to Buy, on the shares.
Analysts other than those at Wells Fargo are also bullish on Marathon Petroleum Corporation (NYSE:MPC). On June 13, BMO Capital analyst Phillip Jungwirth initiated coverage of Marathon Petroleum Corporation (NYSE:MPC) with an Outperform rating and a $135 price target.
Other reasons why Marathon Petroleum Corporation (NYSE:MPC) should be on investors’ watchlists for a recession right now are that the company is currently trading at a discount and is also offering a strong dividend yield. As of June 22, Marathon Petroleum Corporation (NYSE:MPC) has a forward PE ratio of 6.82, a dividend yield of 2.66%, and has returned 48.94% to investors over the past twelve months.
At the end of Q1 2022, 43 hedge funds disclosed ownership of stakes in Marathon Petroleum Corporation (NYSE:MPC). These funds held collective stakes worth $2.51 billion in the company, up from $2.22 billion a quarter ago when 41 hedge funds held stakes in the company. The hedge fund sentiment for the stock is positive.
As of March 31, Elliott Management owns over 11 million shares of Marathon Petroleum Corporation (NYSE:MPC), which makes it the top shareholder in the company with stakes worth $946.05 million.
Here is what Clark Street Value had to say about Marathon Petroleum Corporation (NYSE:MPC) in its fourth-quarter 2021 investor letter:
“During the worst of covid, I bought some LEAPs on Marathon Petroleum (MPC) as a proxy for Par Pacific (PARR) since long dated options weren’t available on the later. Those MPC calls expire next month and I’ll take profits, with PARR I’ve reduced my position throughout the year and might sell the rest early next year, I’ve owned it for 6-7 years and it has gone nowhere, they haven’t touched the NOLs, just a difficult business that I probably don’t understand as well as I should.”
7. Colgate-Palmolive Company (NYSE:CL)
Number of Hedge Fund Holders: 50
Colgate-Palmolive Company (NYSE:CL) was ranked among Wells Fargo’s consumer staples picks for a recession. The company is a dividend payer, a key feature that reassures investors of a stable income. On June 9, Colgate-Palmolive Company (NYSE:CL) declared a quarterly cash dividend of $0.47 per share, in line with the company’s prior dividend. The dividend is payable on August 15 to investors of record at the close of business on July 21.
On June 17, Argus analyst Christopher Graja reiterated his $90 price target and Buy rating on Colgate-Palmolive Company (NYSE:CL). Graja noted that the consumer staples company is dedicated to offsetting inflation and staying on track to achieve its long-term financial milestones while focusing on innovative and premium products which will allow Colgate-Palmolive Company (NYSE:CL) to pass on high costs to consumers.
As of June 22, Colgate-Palmolive Company (NYSE:CL) has a forward dividend yield of 2.54% and the company has been growing its dividends for the past 21 years, with a 5-year dividend CAGR of 3.00%.
At the end of the first quarter of 2022, 50 hedge funds were bullish on Colgate-Palmolive Company (NYSE:CL). These funds held collective stakes worth $2.59 billion in the company, up from $2.06 billion in the preceding quarter with 48 positions. The hedge fund sentiment for the stock is positive.
As of March 31, First Eagle Investment Management is the top shareholder in Colgate-Palmolive Company (NYSE:CL). The fund’s stakes in the company are valued at $856.63 million, which covers 2.09% of its investment portfolio.
6. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders: 53
Analysts are bullish on Chevron Corporation (NYSE:CVX) and the stock was also among Wells Fargo’s top energy stock picks for a recession. As of June 9, Credit Suisse analyst Manav Gupta has a $202 price target and an Outperform rating on Chevron Corporation (NYSE:CVX). Moreover, as of June 22, the stock has returned 45.29% to investors over the past twelve months, which gives all the more reason for potential investors to add it to their watch lists.
Other salient features that made us choose Chevron Corporation (NYSE:CVX) from Wells Fargo’s picks were the stock’s price-to-earnings ratio and dividend yield. As of June 22, Chevron Corporation (NYSE:CVX) has a forward PE ratio of 8.69 and a dividend yield of 3.83%. The company has been growing its dividends for the past six years and has a 5-year dividend CAGR of 5.07%.
At the end of Q1 2022, 53 hedge funds held stakes in Chevron Corporation (NYSE:CVX) worth $27.99 billion. Comparing this to Q4 2021, 53 hedge funds were long Chevron Corporation (NYSE:CVX) with stakes worth $6.50 billion.
As of March 31, Berkshire Hathaway owns the most shares of Chevron Corporation (NYSE:CVX), which makes it the most prominent hedge fund having stakes in the company. Berkshire Hathaway’s stakes in Chevron Corporation (NYSE:CVX) were valued at $25.91 billion at the end of Q1 2022.
Here is what ClearBridge Investments had to say about Chevron Corporation (NYSE:CVX) in its “Large Cap Value Strategy” first-quarter 2022 investor letter:
“The energy sector, which led a strong market in 2021, generated even more dramatic relative performance in the quarter, advancing 39% and leading the benchmark Russell 1000 Value Index. Years of restrained investment in the energy sector, combined with a strong post-pandemic recovery, contributed to the higher commodity prices. The upward pressure escalated with the Russian invasion of Ukraine. Our energy holding Chevron (NYSE:CVX) benefited from higher commodity prices and was among the top contributors to first-quarter performance.”
5. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 64
Wells Fargo named The Coca-Cola Company (NYSE:KO) among its top 5 consumer staples picks for a recession. We included The Coca-Cola Company (NYSE:KO) in our rankings because of the company’s dividend history, global presence, and pricing power over peers. As of June 22, the stock has a forward dividend yield of 2.96% and has gained 11.25% over the past twelve months.
Another major American bank, Morgan Stanley, compiled a list of “top stocks insulated from risk with recession not fully priced in”, in which they ranked The Coca-Cola Company (NYSE:KO). Morgan Stanley analysts have an Overweight rating on The Coca-Cola Company (NYSE:KO) and see an upside to the stock’s price target as we progress into 2023.
Insider Monkey spotted 64 hedge funds bullish on The Coca-Cola Company (NYSE:KO) at the close of Q1 2022. The total stakes of these funds came in at $29.17 billion, up from $28.61 billion a quarter ago with 70 positions.
As of March 31, Berkshire Hathaway owns 400 million shares of The Coca-Cola Company (NYSE:KO), making it the top shareholder in the beverages giant.
ClearBridge Investments mentioned The Coca-Cola Company (NYSE:KO) in its “Dividend Strategy” fourth-quarter 2021 investor letter. Here is what the firm said:
“Over the last year, we have repositioned our portfolio to navigate the course we see ahead. We added to more defensive areas of the portfolio like consumer staples (Coca-Cola). While the next month or two will likely prove choppy on account of the Omicron variant, we believe that Omicron, like Delta, represents a speed bump on the way to recovery rather than a true change in course. We see strong economic momentum continuing in 2022 and we expect interest rates to rise. After a decade of remarkably low rates, we would not be surprised if this change in direction is accompanied by some fits and starts in the markets. With our emphasis on pricing power, purposeful sector exposure, valuation discipline, and a strong dividend profile, we believe we are well-positioned for the year ahead.”
4. AT&T Inc. (NYSE:T)
Number of Hedge Fund Holders: 74
On April 21, AT&T Inc. (NYSE:T) released its earnings for the fiscal first quarter of 2022. The company registered an EPS of $0.77 and outperformed consensus by $0.02. The company’s revenue declined by 13.28% year over year and came in at $38.11 billion, missing expectations by $129.79 million. Regardless of experiencing declining sales, the stock was named among Wells Fargo’s top recession stock picks from the communication services sector.
As of June 22, AT&T Inc. (NYSE:T) has a dividend yield of 5.73% and a forward PE ratio of 7.55, two additional features that merited its inclusion in our selection of the best recession stocks to buy according to Wells Fargo.
AT&T Inc. (NYSE:T) is receiving Buy ratings from other financial experts as well. On June 16, Tigress Financial analyst Ivan Feinseth reiterated a Buy rating on AT&T Inc. (NYSE:T) but lowered his price target on the shares to $28 from $31.
Hedge funds are initiating positions in AT&T Inc. (NYSE:T). At the close of Q1 2022, 74 hedge funds held stakes in the company, up from 70 positions a quarter ago. The stakes of the hedge funds in Q1 amounted to roughly $4.0 billion, down from $4.9 billion a quarter ago.
As of March 31, Arrowstreet Capital owns the most shares of AT&T Inc. (NYSE:T), roughly 28.7 million, and is the dominating shareholder in the company.
Weitz Investment Management mentioned AT&T Inc. (NYSE:T) in its “Hickory Fund” fourth-quarter 2021 investor letter. Here is what the firm thinks about AT&T Inc. (NYSE:T):
“After several quarters of pandemic-induced outsized growth, new broadband connection growth has slowed for U.S. cable operators. This slower growth has coincided with a renewed push by competitors like Verizon and AT&T Inc. (NYSE:T) to offer high-speed data (either via wireless connects or by building new fiber-optic networks).”
3. Comcast Corporation (NASDAQ:CMCSA)
Number of Hedge Fund Holders: 78
Comcast Corporation (NASDAQ:CMCSA) is receiving consensus Buy ratings from expert analysts and was also ranked among Wells Fargo’s top communication services stock picks for a recession. As of June 2, Benchmark analyst Matthew Harrigan has a $60 price target and Buy rating on Comcast Corporation (NASDAQ:CMCSA).
Comcast Corporation (NASDAQ:CMCSA) is an undervalued dividend-paying communication services stock to look into. As of June 22, the stock has a forward dividend yield of 2.79% and a PE ratio of 10.76. On May 10 the company’s board of directors declared a quarterly cash dividend of $0.27 per share, payable on July 27, to shareholders of record on July 6.
Insider Monkey found 78 hedge funds that were bullish on Comcast Corporation (NASDAQ:CMCSA) in the first quarter of 2022. These funds held collective stakes worth $7.12 billion in the company.
As of March 31, First Eagle Investment Management is the leading shareholder in Comcast Corporation and has a total stake of $1.40 billion in the company.
Here is what ClearBridge Investments had to say about Comcast Corporation (NASDAQ:CMCSA) in its “All Cap Growth Strategy” fourth-quarter 2021 investor letter:
“Weakness among our holdings in the communication services sector was the other detractor to performance. Comcast was hurt by tepid subscriber growth in its broadband business but demonstrated strong growth in free cash flow, positioning the company for accelerated capital return going forward.”
2. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 83
From Wells Fargo’s healthcare stock picks for a recession, we have chosen Johnson & Johnson (NYSE:JNJ). The company’s legacy business operations and rich dividend history make it a compelling investment option for challenging times like these. As of June 22, Johnson & Johnson (NYSE:JNJ) has a forward dividend yield of 2.67% and has gained 5.74% over the past twelve months.
On April 19 Johnson & Johnson (NYSE:JNJ) reported earnings for the first quarter of fiscal year 2022, in which it exceeded EPS expectations. The company reported earnings per share of $2.67 and beat estimates by $0.10. The company’s revenue for the quarter amounted to $23.43 billion, up 4.95% year over year, but missed estimates by $192.16 million. As of May 23, SVB Leerink analyst David Risinger has an Outperform rating and a $200 price target on Johnson & Johnson (NYSE:JNJ).
As of March 31, Arrowstreet Capital is the most prominent shareholder in Johnson & Johnson (NYSE:JNJ). The fund’s stakes in the healthcare giant are valued at $1.17 billion, up 38% from its Q4 2021 stakes.
At the end of the first quarter of 2022, 83 hedge funds were bullish on Johnson & Johnson (NYSE:JNJ) with stakes worth $7.40 billion. This is compared to 83 positions in the fourth quarter of 2021, with stakes worth $7.38.
1. Berkshire Hathaway Inc. (NYSE:BRK-B)
Number of Hedge Fund Holders: 104
Berkshire Hathaway Inc. (NYSE:BRK-B) was among Wells Fargo’s top financials stock picks for a recession. At the close of Q1 2022, 104 hedge funds disclosed ownership of stakes in Berkshire Hathaway Inc. (NYSE:BRK-B). These funds held collective stakes worth $19.06 billion in the company. The conglomerate has a diverse portfolio of investments spanning technology, services, consumer staples, healthcare, and energy among others. A diverse portfolio allows Berkshire Hathaway Inc. (NYSE:BRK-B) to manage risk and makes it a relatively less volatile stock to invest in.
This April, Berkshire Hathaway Inc. (NYSE:BRK-B) announced another strong quarter when it released its earnings for the first quarter of fiscal year 2022. The company’s revenue for the quarter amounted to $70.81 billion, up 9.61% year over year, and was ahead of expectations by $1.66 billion. Berkshire Hathaway Inc. (NYSE:BRK-B) registered an EPS of $3.18 and outperformed Wall Street consensus by $0.31.
As of March 31, Bill & Melinda Gates Foundation Trust owns more than 28 million shares of Berkshire Hathaway Inc. (NYSE:BRK-B) which amounts to a stake of $10.12 billion. Bill & Melinda Gates Foundation Trust is the leading stakeholder in the company.
Here is what Black Bear Value Partners had to say about Berkshire Hathaway Inc. (NYSE:BRK-B) in its first-quarter 2022 investor letter:
“Below is the rough Berkshire on-a-napkin valuation I like to do periodically. Recently BRK acquired Alleghany for $11.6BB. I assume a reduction in cash for this amount and an increase of $550MM in operating income. I do not give benefit to the increased float nor any synergies. Again, this is a rough exercise to sanity check our assumptions.
Cash of ~$103,000 per class A Share (vs. $104k 1 year ago)
-Down/Base/Up marks cash at book value to an 8% premium (vs. to 10% a year ago)
-Investments based on December prices ~$248,000 per class A share (vs. $194k a year ago)
Presume a range of stock prices that result in:
-Down = $149,000 per class A share (-40%- assumes portfolio is overpriced)
-Base = $211,000 per class A share (-15% – assumes portfolio is overpriced)
-Up = $285,000 per class A share (+15%)
Operating businesses that should generate ~$17,000 of pre-tax income per Class A share (vs. $15k)
-Down = 9x = $153,000 per share – equates to ~8% FCF yield
-Base = 12x = $204,000 – equates to ~6% FCF yield
-Up = 12x = $204,000 – equates to ~6% FCF yield
Overall (vs. $529,000 at quarter end)
-Down = $413,000 (-28%)
-Base = $526,000 (fairly priced)
-Up = $600,000 (13% underpriced)
Going forward I expect Berkshire to compound at good, not great returns. The likely question is why own it at all if we expect modest returns…
BRK is a collection of high-quality businesses, excellent management, and a good amount of optionality in their cash position. If the cash were to be deployed accretively the true value would be greater than an 8% premium (as mentioned above). The combination of a pie that is growing, an increasing share of said pie due to stock buybacks, upside optionality from cash and a tight range of likely business outcomes that span a variety of economic futures gives me comfort in continuing to own Berkshire.”
You can also take a look at 10 Stocks to Buy Before the Next Recession and 10 Best Recession Stocks To Buy.
Follow Insider Monkey on Twitter
Suggested Articles:
- Morgan Stanley’s Top 10 Stock Picks for 2022
- 10 Stocks That are Benefiting From Rising Inflation
- 10 Best Inflation-Proof Stocks
Disclose. None. 10 Best Recession Stocks to Buy According to Wells Fargo is originally published on Insider Monkey.
