In this article, we discuss 10 safe stocks to buy during recessions.
Investors concerned about a recession this year have prompted many brokers, advisors, and fund managers to become far more cautious. Even though firms are maintaining strong profit forecasts, consumers and retailers are indicating early signs of spending cuts and limiting themselves to more basic necessities. The S&P 500 Index, the Dow 30 Index, and the NASDAQ Composite Index finished the last week in the green for the first time in the previous seven weeks. The S&P 500 Index came to touching distance to the bear market before recovering partially. The reason for such bearish sentiment was that the Federal Reserve is looking to increase the interest rate to combat high inflation. Meanwhile, the end to the conflict between Russia and Ukraine is nowhere in sight. A large portion of the inflation problem can be traced back to the unprecedented $3.9 trillion in fiscal stimulus put into the economy in 2020 and 2021, as well as the Federal Reserve’s monthly bond purchases of over a hundred billion dollars since Covid-19’s peak.
The US GDP growth has declined from 12.2% in Q2 2021 to 3.5% in the first quarter of 2022. When the US economy enters into a recession, the majority of companies lose their market value due to the economic downturn. According to CNN, during the 2008 recession, only 25 stocks in the S&P 500 Index generated positive returns for the year. It’s difficult for the regular investor to locate a safe haven during such an economic situation. Recessions are frequently followed by pure bear markets, with stock prices dropping by more than 20% and, in some cases, substantially more. The bond market is no longer a place of refuge, especially with the Fed raising interest rates fast. Equities and bonds are more risky than normal, and rising inflation means that even savings are losing value. It would be prudent to brace oneself for more bad economic news in the future.
With this context in mind, we have created a list of 10 safe stocks to buy during recessions, which includes companies with strong growth trajectories such as Walmart Inc. (NYSE:WMT), McDonald’s Corporation (NYSE:MCD), and Abbott Laboratories (NYSE:ABT).
Photo by Joshua Mayo on Unsplash
Our Methodology
Let’s begin our list of 10 safe stocks to buy during recessions. We have looked at the analyst ratings, hedge fund data, and business fundamentals for each company. Over 900 elite hedge funds were tracked by Insider Monkey at the end of Q1 2022 to gauge the hedge fund sentiment concerning each stock.
10 Safe Stocks to Buy During Recessions
10. The Procter & Gamble Company (NYSE:PG)
Number of Hedge Fund Holders: 72
The Procter & Gamble Company is a Cincinnati, Ohio-based consumer goods company involved in the manufacturing and distribution of a broad range of personal care and hygiene products.
The Q3 FY22 results revealed that The Procter & Gamble Company experienced a 10% organic growth in sales. If we dissect these numbers further, we find out that sales volume also increased by 3%. This is a positive development for The Procter & Gamble Company because it reflects that customers did not cut down on volumes, despite an increase in prices. Although its European competitor, Unilever, reported a bigger rise in organic sales of 12%, it experienced a 1% decline in volume, reflecting that consumers either cut down on spending or switched to other brands.
Moreover, The Procter & Gamble Company has no exposure to the food segment, unlike its competitor Unilever. This works in the company’s favor as due to the Russia-Ukraine conflict, food companies have come under pressure because of a significant spike in commodity prices.
The Procter & Gamble Company was held by 72 hedge funds at the end of Q1 2022.
9. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 64
The Coca-Cola Company (NYSE:KO) is an Atlanta, Georgia-based non-alcoholic beverage company with a diversified portfolio of 500 brands present in almost 200 countries across the globe.
On May 9, Bank of America added The Coca-Cola Company to the “US 1 list”, which comprises of best investment ideas extracted from the stocks that have a Buy call by analysts at the financial services and investment firm. Although The Coca-Cola Company reported a decline in revenue because of exiting the Russian market and the COVID-19 related lockdowns in China, Q1 2022 numbers were positive for the company. The Coca-Cola Company’s operating income, net income, EPS, and subsequently, the share price reached an all-time high.
The total addressable market (TAM) for non-alcoholic beverages stands at $833.1 billion and is expected to compound annually by 5.6% until the end of this decade. The Coca-Cola Company also has products like Coca-Cola Zero in its portfolio, which is gaining momentum as consumers’ preference is changing towards no or low sugar offerings.
The Coca-Cola Company was mentioned in the Q4 2021 investor letter of ClearBridge Investments. Here’s 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.”
As of Q1 2022, The Coca-Cola Company was held by 64 hedge funds.
8. Constellation Brands, Inc. (NYSE:STZ)
Number of Hedge Fund Holders: 41
Constellation Brands, Inc. (NYSE:STZ) is a New York-based producer of beer, wine, and other forms of alcoholic beverages. In terms of sales, the company is the largest beer-import corporation in the US.
Constellation Brands, Inc. can handle the cost pressures due to its sector-leading margins. The young demographic consuming Constellation Brands’ products is also a positive for the company as the growing Hispanic community is the biggest consumer of the brand. Constellation Brands is the custodian of Modelo and Corona, two of the leading beer brands in the US.
In Q1 2022, Constellation Brands, Inc. posted an EPS Normalized Actual of $2.37, beating the analysts’ estimates by $0.25. Moreover, the company surpassed the revenue estimates by $85.6 million.
Amongst the 41 hedge funds holding a stake in Constellation Brands, Inc., the biggest stake was held by Harris Associates, with a value of $771.78 million as of March 31.
7. Synopsys, Inc. (NASDAQ:SNPS)
Number of Hedge Fund Holders: 43
Synopsys, Inc. (NASDAQ:SNPS) is a Mountain View, California-based electronic design automation platform provider that engineers can use to design and test semiconductor chips and other software applications. The semiconductor industry is secular as the demand for chip testing and design services is constant across all economic cycles. This is evident by the fact that Charles Shi at Needham increased the price target on Synopsys, Inc. from $370 to $380 and reiterated a Buy rating in a note issued to investors on May 19.
The analyst shared that although Synopsys, Inc. stock price has slipped by 20% since January, it seems that it has found its bottom and will recover in due course. Shi added that in a bear market, there are very few options to invest in, but Electronic Design Automation Stocks like Synopsys, Inc. present an attractive opportunity.
Carillon Tower Advisers shared its insights on Synopsys, Inc. in its Q4 2021 investor letter. Here’s what it said:
“Synopsys is a semiconductor software company that supplies electronic design automation solutions to the global electronics market. The firm’s shares outperformed in the quarter after management outlined a longer-term vision at the company’s analyst day and suggested a higher level of growth going forward than it has achieved in the previous few years. Synopsys is becoming a key supplier of leading-edge semiconductor designs that are getting increasingly more difficult for chip companies to build on their own. On top of accelerating topline growth, the company also posts healthy profits and robust cash flow generation.”
As of Q1 2022, 43 hedge funds held a stake in Synopsys, Inc..
6. NextEra Energy Inc. (NYSE:NEE)
Number of Hedge Fund Holders: 64
NextEra Energy Inc. (NYSE:NEE) is a Juno Beach, Florida-based electric power and energy infrastructure company that produces, transmits, and distributes electricity. The company is leading the clean-energy initiative by employing renewable energy for electricity generation.
In a note issued to investors on April 25, Nicholas Campanella at Credit Suisse assumed coverage of NextEra Energy Inc. with an Outperform rating and a price target of $87. The target price assumes a potential upside of 12.3% from the previous closing price. The analyst thinks that NextEra Energy Inc. is a leading utility and renewable energy producer that has a strong following in the renewable energy supply chain debate. Campanella stated that despite the supply chain-related challenges in the short term, NextEra Energy Inc. is in a stable position, compared to its competitors, due to the company’s scale and size.
At the end of Q1 2022, 64 hedge funds held a stake in NextEra Energy Inc., up from 55 in the preceding quarter.
In addition to NextEra Energy Inc., stocks such as Walmart Inc., McDonald’s Corporation, and Abbott Laboratories are amongst the 10 safe stocks to buy during recessions.
5. Walmart Inc. (NYSE:WMT)
Number of Hedge Fund Holders: 60
Walmart Inc. is a Bentonville, Arkansas-based operator of discount department stores, hypermarkets, and grocery stores. The company operates on the motto “Everyday Low Prices.”
Walmart Inc. is a member of the prestigious Dividend Aristocrat list as the company has been increasing its dividends for the past 49 years, and next year will become a ‘Dividend King.’ During the 2008 recession, the share price of Walmart Inc. increased by 20% and was the sixth-best performer in the S&P 500 Index for that year.
On May 24, Walmart Inc. revealed that it would be expanding its drone delivery to six states across the United States. The company’s SVP of innovation and automation shared that the company aims to extend the DroneUp delivery system to 34 sites by the end of 2022. This would allow Walmart Inc. to deliver over 1 million parcels annually by drone.
Investing in Walmart Inc. has also become attractive due to the inflationary pressures weighing upon the economy. The price hikes are forcing consumers to switch to more economical solutions for their everyday requirements. Thus, big-box retailers like Walmart Inc. are likely to do well in recessions.
4. Abbott Laboratories (NYSE:ABT)
Number of Hedge Fund Holders: 68
Abbott Laboratories is a Chicago, Illinois-based healthcare company that manufactures and sells branded generic medicines, diagnostic tools, medical devices, and nutritional products.
In Q1 2022, Abbott Laboratories saw its revenue increase by 17.5% to $11.89 billion. In a note issued to investors on May 23, equity strategist Mike Wilson at Morgan Stanley picked Abbott Laboratories as one of the 15 stocks that can weather a bear market. Following the emergence of monkeypox cases around the world, Abbott Laboratories is working on developing a test for monkeypox.
As of Q1 2022, Fisher Asset Management was the leading investor in Abbott Laboratories. The number of hedge funds invested in Abbott Laboratories increased by four to 68 on a sequential basis.
Richie Capital Group shared its insights on Abbott Laboratories in its Q4 2021 investor letter. Here’s what it said:
“Abbott Labs (ABT – up 20.08%) – Abbot Labs continues to benefit from resurging demand for Covid testing kits. The company is planning to increase their monthly production of BinaxNOW athome rapid tests to 100M a month, a 43% increase from current levels.”
3. McDonald’s Corporation (NYSE:MCD)
Number of Hedge Fund Holders: 58
McDonald’s Corporation is a Chicago, Illinois-based fast-food company founded in 1940 by Richard and Maurice McDonald in San Bernardino, California.
On May 16, McDonald’s Corporation announced that it would exit the Russian market after serving it for three decades because of the Russia-Ukraine conflict. In a challenging macroeconomic environment, McDonald’s Corporation can outperform its competitors as it has a strong distribution network that helps in controlling costs during inflationary periods and delivering products through improved digital and delivery capabilities. The contribution of digital sales from the top six markets served by McDonald’s Corporation increased to 30% in Q1 2022 as opposed to 20% in 2020
Furthermore, the company’s ability to modify its offerings according to the local market’s needs is another plus point for the fast-food chain operator. McDonald’s Corporation has increased the number of restaurants making deliveries from 65% in Q1 2019 to 80% in Q1 2022. The company also reported a 12% increase in global comparable sales in Q1 2022.
At the end of Q1 2022, 58 hedge funds held a stake in McDonald’s Corporation.
2. C.H. Robinson Worldwide, Inc. (NYSE:CHRW)
Number of Hedge Fund Holders: 23
C.H. Robinson Worldwide, Inc. (NYSE:CHRW) is an Eden Prairie, Minnesota-based third-party logistics provider (3PL), serving different industries across the globe.
The company is exploring autonomous driving to counter the problem of driver shortages and hauling capacity restraints. C.H. Robinson Worldwide, Inc. has formed a long-term strategic partnership with Alphabet Inc’s (NASDAQ:GOOGL) Waymo. Under this partnership, Waymo’s autonomous driving platform will be integrated with C.H. Robinson Worldwide, Inc.’s Navisphere technology. If the partnership is executed successfully, it will provide a significant boost to the company’s margins.
The analysts are also bullish on C.H. Robinson Worldwide, Inc. as Jason Seidl at Cowen increased the target price on the stock from $109 to $123 and reiterated an Outperform rating. The analyst highlighted that C.H. Robinson Worldwide, Inc. had found itself in a sweet spot in the brokerage space.
Overall, 23 hedge funds held a stake in C.H. Robinson Worldwide, Inc. at the end of Q1 2022.
1. AutoZone, Inc. (NYSE:AZO)
Number of Hedge Fund Holders: 38
AutoZone, Inc. (NYSE:AZO) is a Memphis, Tennessee-based aftermarket automotive parts retailer with more than 6,100 locations across the US, Mexico, Puerto Rico, and Brazil.
In the past decade, AutoZone, Inc. has been on an aggressive share buyback plan. It has reduced its total outstanding shares from 42 million to 28 million shares and still has an authorized share buyback plan of $2 billion in place. The gross profit margin of AutoZone, Inc. stands at 52%. The high margins provide a cushion during the inflationary period.
The company is on its way to reporting the third-highest inflationary year as the prices of motor vehicle parts rose by 9.38%. AutoZone, Inc. also has the option to source these auto parts from low-cost producing countries like Taiwan and Vietnam. Thus, a lower buying price and a higher selling price could further improve the company’s margins.
Although the automobile supply chain has come under pressure due to the chip shortage AutoZone, Inc. has not been significantly impacted by this development as it sells basic parts like brakes, mufflers, and spark plugs.
Overall, 38 hedge funds held a stake in AutoZone, Inc. at the end of Q1 2022.
You can also take a peek at the 10 Biotech Stocks to Buy Today According to Ken Fisher’s Fisher Asset Management and 10 Favorite Stocks of Dan Loeb’s Third Point.
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This article is originally published at Insider Monkey.
