In this article, we will look at 4 stocks that Jim Cramer is recommending for a “mild” recession. If you want to explore similar stocks, you can also take a look at 2 Jim Cramer Stocks for ‘Mild’ Recession.
Inflation Vs The Fed
Inflation has been running at a 40-year high in 2022. According to the U.S. Bureau of Labor Statistics, the consumer price index rose 9.1% year over year in June 2022. The energy index led and rose 41.6% year over year in June, the largest annual increase since April 1980. The food index followed and rose 10.4% year over year in June, the largest annual increase since February 1981. In efforts to slow down the economy and bring inflation down to 2%, on July 27, the Fed raised interest rates by three-quarters of a percentage point, bringing its benchmark fund’s target rate to a range between 2.25% and 2.5%.
Two Consecutive Quarters of Negative GDP Growth
According to the Bureau of Economic Analysis, the U.S. economy’s real gross domestic product declined by 0.9% year over year in the second quarter of 2022. In the first quarter of 2022, the real GDP declined by 1.6% year over year. Two consecutive quarters of negative GDP growth and a yield-curve inversion are both historic indicators of a recession as per financial experts and economists. However, Forbes explained how the National Bureau of Economic Research determines if the U.S. is in an expansion or a recession.
The NBER makes the final call about the economic cycle the United States is in and it does so by examining three things: Duration, Depth, and Diffusion. The NBER first looks at the duration and sees if the U.S. economy has declined for two consecutive quarters or six months. Secondly, the NBER examines the depth of the decline. So far, the economy has declined by 1% to 2% but historically, recessions have occurred when the economy declined by approximately 5% or more. Lastly, the NBER looks at all sectors of the economy and how they are moving but it is not necessary for all sectors to suffer during a recession. Forbes pointed out that the energy sector has historically performed relatively well in recessions.
Jim Cramer’s Thinks We Are Headed For a Mild Recession
On July 22 Jim Cramer of Mad Money on CNBC talked about how recession fears are impacting the markets and put forth three likely scenarios for a recession. The former hedge fund manager also recommended his top stock picks for each type of recession which he labeled as mild, moderate, and severe. Jim Cramer thinks that the U.S. is headed into a mild recession. Here is an excerpt from his video:
“For the past eight days this market has been trading like we are headed for a mild recession. Why? Because of the banks… If you talk to Bank of America, Citi, or if you talk to JP Morgan, they will tell you that the consumer is in great shape. When you consider the strong job market and all the money people saved during the pandemic, it’s possible that the consumer can ride out a wave of disappointment.”
For a moderate and a severe recession, Jim Cramer recommends buying “high-yielding” dollar store stocks and consumer staple stocks. Jim Cramer’s top picks for a deeper recession include Dollar General Corporation (NYSE:DG), Johnson & Johnson (NYSE:JNJ), and PepsiCo, Inc. (NYSE:PEP).
We picked the stocks for this article from Jim Cramer’s episode on July 22 in which he discussed the 3 possible scenarios for a recession and then recommended a different portfolio for each of them. For the purposes of this article, we picked the stocks that the stock market expert recommended for a mild recession. We included the hedge fund sentiment and analyst rating for each stock and ranked these stocks in increasing order of hedge fund holders. The hedge fund sentiment was derived from Insider Monkey’s database which keeps track of roughly 900 elite hedge funds.
Jim Cramer Stocks for ‘Mild’ Recession
4. D.R. Horton, Inc. (NYSE:DHI)
Number of Hedge Fund Holders: 52
D.R. Horton, Inc. (NYSE:DHI) is the largest homebuilder in the United States by volume. Jim Cramer noted that D.R. Horton, Inc. (NYSE:DHI) reported strong earnings but also saw elevated cancellations and moderation in demand in the second quarter of 2022. He sees potential in D.R. Horton, Inc. (NYSE:DHI) to weather a mild recession and also believes that the stock is undervalued at current levels. As of August 4, D.R. Horton, Inc. (NYSE:DHI) has a trailing twelve-month PE ratio of 4.94 and is offering a forward dividend yield of 1.16%.
Wall Street is also bullish on D.R. Horton, Inc. (NYSE:DHI). On July 22, BTIG analyst Carl Reichardt revised his price target on D.R. Horton (NYSE:DHI) to $92 from $97 and reiterated a Buy rating on the shares. The analyst noted that the company’s strong earnings for its fiscal third quarter were primarily driven by better gross margin and average selling prices than expected. Reichardt revised his price target on the stock to reflect a weakening demand in the housing sector but expects D.R. Horton, Inc. (NYSE:DHI) to offset its operational ROE decline by active share buybacks.
On July 21, D.R. Horton, Inc. (NYSE:DHI) released earnings for the fiscal third quarter of 2022. The company reported earnings per share of $4.67, up 53% year over year, and beat Wall Street estimates by $0.15. D.R. Horton, Inc. (NYSE:DHI) reported revenue of $8.79 billion, up 21% year over year. The company’s consolidated pre-tax income grew by 54% year over year to $2.2 billion and its consolidated pre-tax profit margin improved by 540 basis points to 24.8%. D.R. Horton, Inc. (NYSE:DHI) also reported that its homebuilding trailing twelve-month return on inventory for the quarter ending on June 30 was 41.7%, and its consolidated return on equity was 35.1%. The company’s management further added that they see D.R. Horton, Inc. (NYSE:DHI) well positioned to meet the volatile market conditions in the housing sector and noted that the company’s strong balance sheet, liquidity, and loan leverage will help them optimize returns.
D.R. Horton, Inc. (NYSE:DHI) has been consistently growing its dividends for the past 8 years. The stock has an annual dividend payout ratio of 5.62% and a 5-year dividend CAGR of 18.15%. On July 21, D.R. Horton, Inc. (NYSE:DHI) announced that its board of directors has declared a quarterly cash dividend of $0.225 per share. The dividend is payable on August 11 to investors of record at the close of business on August 4.
At the end of the first quarter of 2022, 52 hedge funds disclosed ownership of stakes in D.R. Horton, Inc. (NYSE:DHI). The total value of these stakes amounted to $1.94 billion. As of March 31, Egerton Capital Limited is the largest shareholder in D.R. Horton, Inc. (NYSE:DHI) and has stakes worth $582.58 million in the company.
Investment management firm, Palm Valley Capital Management, mentioned D.R. Horton, Inc. (NYSE:DHI) in its second-quarter 2022 investor letter. Here is what the firm had to say:
“Vidler Water was acquired by homebuilder D.R. Horton (NYSE:DHI) during the second quarter for $15.75 per share, a modest 19% premium to the 90-day volume weighted average price. D.R. Horton can use Vidler’s water rights to satisfy government requirements to have water resources available before it breaks ground on new housing developments in Nevada. The takeover price was below our valuation, but D.R. Horton was the only real buyer who stepped up to the plate for Vidler’s assets. The deal appears to have leaked early, since the stock surged in the weeks before the announcement.”
Jim Cramer’s favorite stocks for a deeper recession include Dollar General Corporation (NYSE:DG), Johnson & Johnson (NYSE:JNJ), and PepsiCo, Inc. (NYSE:PEP).
3. Micron Technology, Inc. (NASDAQ:MU)
Number of Hedge Fund Holders: 78
Jim Cramer noted that Micron Technology, Inc. (NASDAQ:MU) was trading in anticipation of a deeper recession and that it has bottomed enough. He recommends the stock for a mild recession and sees it achieving a price target of $70. On August 4, Micron Technology, Inc. (NASDAQ:MU) closed at $64.85. Wall Street is also bullish on Micron Technology, Inc. (NASDAQ:MU). On July 1, Citi analyst Christopher Danely revised his price target on Micron Technology, Inc. (NASDAQ:MU) to $80 from $85 and reiterated a Buy rating on the shares. Analysts at UBS think that Micron Technology, Inc. (NASDAQ:MU) will continue to drive and sustain gross margins even if consumer demand dampens in 2022. UBS analysts have an Overweight rating on Micron Technology, Inc. (NASDAQ:MU) and see the stock attaining a $90 price target.
Micron Technology, Inc. (NASDAQ:MU) is making efforts to maintain its leading position in the semiconductor industry. On July 6, Micron Technology, Inc. (NASDAQ:MU) announced that its DDR5 server DRAM is now in circulation for commercial and industrial use. The company’s next-generation DDR5 memory provides a performance increase of up to 85% in system performance over its DDR4 DRAM and also maximizes performance for applications in artificial intelligence, high-performance computing, and data-intensive applications.
On July 26, Micron Technology, Inc. (NASDAQ:MU) started the production of the world’s first 232-layer NAND. This next-generation NAND is more powerful than the company’s previous NANDs in terms of capacity and energy saving and is designed to handle huge amounts of data in both client and cloud applications.
On July 28, the Biden administration signed a $52 billion grant to incentivize domestic semiconductor manufacturing for the semiconductor industry. Shortly after, Micron Technology, Inc. (NASDAQ:MU) announced that these incentives will allow it to grow its operations and production capacity of memory chips significantly in the years to come. The company noted that currently, the U.S. accounts for 2% of the global memory supply and that the CHIPS act will allow Micron Technology, Inc. (NASDAQ:MU) to significantly grow this share.
At the end of the first quarter of 2022, 78 hedge funds held stakes in Micron Technology, Inc. (NASDAQ:MU). The total value of these stakes amounted to $3.42 billion. Of these, Matrix Capital Management was the largest shareholder in the company and disclosed ownership of 4 million shares. The investment covers 3.73% of Matric Capital Management’s 13F portfolio.
While Jim Cramer recommends Micron Technology, Inc. (NASDAQ:MU) for a “mild downturn”, he is bullish on Dollar General Corporation (NYSE:DG), Johnson & Johnson (NYSE:JNJ), and PepsiCo, Inc. (NYSE:PEP) for a deeper recession.
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Disclosure: None. 4 Jim Cramer Stocks for ‘Mild’ Recession is originally published on Insider Monkey.