Recession Stocks: What are These and What are Not?
Recession-Proof stocks
Although it can be tempting to breeze through and ride out a recession with no exposure to stocks, investors may find themselves missing out on significant opportunities if they do so. Historically, some companies do well during economic downturns. Therefore, investors might consider developing a strategy based on counter-cyclical stocks with solid balance sheets in recession-resistant industries.
STRONG BALANCE SHEETS
When a recession occurs, one of the best investment strategies is to look for companies that can maintain strong balance sheets or have steady business models amidst the economic drawbacks. These companies include essential consumer goods, conglomerates, defence stocks, and utilities. Therefore, with anticipation for the potential weakening of the economic conditions, investors can prepare by adding enough exposure to these said groups in their portfolios.
Strong Balance Sheets – companies that have less vulnerability in tightening their credit conditions and have easier time management in terms of debts they have incurred. Using a company’s financial reports, one can determine any low debts, healthy cash flows, and profit generation, if any. These factors are beneficial for investors before engaging in any stock investment.
RECESSION-RESISTANT INDUSTRIES
Although it can be a surprise to others, a few industries can perform quite well compared to others during recessions. As a result, investors searching for investment strategies during setbacks in the market usually add these stocks that are considered recession-resistant industries to their expanding portfolios.
These stocks are called “counter-cyclical stocks” because they tend to still be at their very best during recessions. Stocks like these get a significant increase in demand that happens tremendously during income falls or when prevalent economic uncertainty remains. Market prices for these counter-cyclical stocks typically move away in the opposite direction of the current prevailing economic trend. When recessions happen, these counter-cyclical stocks increase their value and decrease during expansions.
Consumer Demand – companies that see significant demand increases during consumer cutbacks involving more expensive brands or goods. In addition, these stocks may also seek refuge and security due to trembling fear and tormenting uncertainty. Considered as ‘outperformers,’ this lineup generally includes companies from the following sectors: alcohol manufacturers, ammunition makers, consumer staples, cosmetics, discount stores, firearm and the best funeral home stocks, and grocery stores.
Stocks That Are Not So Recession-Proof
Knowing assets to avoid having investments can be as crucial to any investor during recessions as information on which companies make profitable investments. Some of the companies and assets that have the most significant risks when a recession strikes are the ones that are highly leveraged, cyclical, or speculative.
CREDIT CRUNCH
More leveraged companies are more vulnerable to tightening credit conditions during a hit from recessions. Although these companies struggle to make payments for their debts, they also face a relative revenue decrease from the ongoing recession. During this instance, it is likely for bankruptcy, or at least a precipitous lowering in shareholder value, to happen, with higher possibilities as such companies experiencing it compared to those that have lower loads of debt.
Highly Leveraged Companies – when a recession happens, most investors should be wise enough to avoid companies considered ‘highly leveraged,’ especially those with significant loads of debt reflecting on their balance sheets. Companies like these typically suffer the burden of higher-than-average interest payments under their shoulders, leading to unsustainable debt-to-equity or DE ratios.
CYCLICAL ASSETS
Stocks that move in the same direction as the underlying economy is at risk when the economy turns down. However, consumers often cut back on their spending when economies falter, especially on these discretionary expenses. Spending reduction also happens on services like travel, restaurants, and leisure. With this, industries involved in these cyclical stocks tend to suffer and make them less attractive to potential investors, especially during recessions.
Cyclical Stocks – often tied with employment and consumer confidence, cyclical stocks are those stocks that get battered quite a lot in a recession. However, these stocks tend to do well when boom times occur. In addition, this incident is most likely to happen when consumers are given more discretionary income than they spend on non-essential or luxury items—companies of high-end cars, furniture, or clothing manufacture are examples of this bunch.
SPECULATION
Asset prices that are speculative are usually fueled by market bubbles formed when an economic boom occurs — consequently going bust when the bubbles finally pop. These stocks have not yet proven themselves in terms of value. As a result, they are often viewed as “under-the-radar” opportunities by investors searching for the next ground floor ample investment opportunity they may find. These stocks have higher risks of falling the fastest, and unfortunately the hardest, during recessions. This is because investors pull money from the market then rush it towards investments of safe-haven, only limiting their overall exposure when market turbulence happens.
Speculative Stocks – richly valued stocks based on the optimism among the base of shareholders. Optimism possessed by investors gets tested during recessions, with these assets typically performing worst during a downturn.
Best Recession-Proof Stocks in Canada
On the other hand, economic indicators tend to be weak as the unemployment rate rises. Furthermore, the increasing global fiscal deficit amidst an increase in spending is a significant cause of concern. This disconnection between the economy and equity markets potentially leads to a market crash. So, adding defensive stocks that are immune to economic drawbacks could stabilize one’s portfolio. Here are three (3) TSX stocks that investors should look at amidst the outlook uncertainty.
Algonquin Power & Utilities
TSX: AQN
NYSE: AQN
- Operates a diversified utility business, delivering electricity, natural gas, and water to more than one (1) million connections.
- Generates two (2) gigawatts of electricity, created from renewable energy resources, with additional construction facilities contributing 1.6 gigawatts of power.
- Sells the generated power from its facilities with the help of long-term contracts.
- Delivers high-quality earnings and predictable cash flows that insulates stock prices from the market volatilities.
- In the last five (5) years, stocks increased by 114% at a CAGR of 16.4%, outperforming some of the broader equity markets easily.
- Rewarded shareholders by raising dividends for the past ten (10) consecutive years.
- Dividend yield currently sits healthy at 4% – close to the best dividend stocks.
- Given its recession-proof business model, stable cash flows, and healthy dividend yields, it would be a great buy in an uncertain outlook.
- Take a look at a Canadian utilities ETF as an alternative.
NorthWest Healthcare Properties REIT
TSX: NWH.UN
- Has high-quality healthcare properties and investments across Canada, Brazil, Europe, Australia, and New Zealand.
- Currently owns 190 properties that cover more or less 15.4 million square feet of gross leasable area.
- 80% revenue is supported directly or indirectly by fundings from public healthcare and delivery of stable and predictable cash flows.
- Enjoys high occupancy rate (standing at 97.2% by September-ending quarter) and rent-collection rate. Its occupancy rate has a weighted average lease of 14.5 years of expiration.
- Collected or deferred 97.6% of its revenue during the third quarter, with collection rates improving to 98.1% by October.
- Pays monthly dividends currently at $0.067 per share at a $0.80 annualized rate and a 6.4% dividend yield.
- They are developing projects worth around $348 million, potentially supporting growth in its earnings in the following years.
- Featured in Canadian REIT ETFs to buy.
TransAlta Renewables
TSX: RNW
- Has a strong operations history of renewable power-generation facilities.
- Today, it owns the following: 23 wind facilities, 13 hydropower generation facilities, seven natural gas generation facilities, and one solar facility.
- With all facilities together, they generate more or less 2,537 megawatts of power, which they sell in the form of long-term contracts, insulating their financials from fluctuations in price and volume.
- The September-ending quarter has adjusted and increased by 12% EBITDA and 8% cash available for distribution, respectively.
- Has more than one (1) gigawatt of healthy-looking wind projects that prospects growth in the developmental pipeline.
- It has paid monthly dividends and had a 4% increase in its dividends at a CAGR of 4% since it went public last 2013.
- Currently, its dividend yield stands healthy at 5.2% which you can follow with the best portfolio tracker.
- With the movement towards renewable resources worldwide amidst the alarmingly still-increasing pollution, an early mover among its co-sectors could greatly benefit from this shift.
Recession-Proof Stocks – Yes, or No?
It is safe to assume that investors who take notice of recession-proof stocks will significantly benefit once the recession hits us all once again. It can be pretty endearing to venture into these types of stocks, given how the global economy shifted just last year due to the COVID-19 pandemic. It can be a far-fetched investment, but who knows? Recession-proof stocks in Canada might be the thing you need as you expand your portfolio towards success and profitability.
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Canadian Stocks to Buy During a Recession
Diversification is one of the essential investment rules and continues to confuse investors. We often hear about picking multiple stocks from different parts of the economy. However, you can benefit from the next downturn by adding one or more recession-proof stocks to your portfolio and adding diversification.
In May 2018, I discussed three recession-resistant stocks to consider in the event of a downturn. Whether you believe in the latter or the former, you will want to buy recession-proof stocks just in case.
The three recession-resistant stocks that I thought would do well in a downturn were those from the recessions of 2001 and 2008. Instead, these three shares have appreciated by 68%, 4%, 11% and 33%, respectively, over the months.
In the current bear market, these stocks have gained 7%. Before the coronavirus decimated stocks in early March, investors drove up these companies’ “share prices because of their natural resilience to recession. O’Reilly holds his own and has earned his place as a stock that can be invested in even during a recession.
The lucrative quarterly dividend yield of 7.16% makes it one of the highest paying assets on the market. However, be wary of chasing companies based on dividend yields, as some companies will try to attract investors with high dividends to distract from their poor underlying health.
Recession-proof stocks are classified as stocks of companies that continue to thrive during economic downturns, such as the current stock market pandemic. Specific industries, such as consumer goods, good food stocks and beverages, are considered recession-resistant because they have been indispensable raw materials. The three stocks listed above are diversified pick-ups that offer investors growth and earnings potential.
As the world grapples with one of the worst health crises in human history, global stock markets have rebounded in the past year. Canadian stock markets, especially gold and technology stocks, have soared on COVID and are enjoying excellent returns, even though the broader TSX index has fallen nearly 2 percent this year. Recession-proof stocks are more likely to endure difficult economic circumstances, emerge victorious from the crisis, and grow out of their situations, such as lockouts.
Stock markets are expected to remain volatile in the short term due to significant macroeconomic challenges at the global level. Although few analysts believe that markets in 2021 will undergo a correction, it makes sense to be prepared for such a scenario.
As mentioned above, it is essential to remember that recessions are different for stocks than for everyone else. Some companies and sectors are immune to recessions, while others are better off in periods of upheaval. Moreover, stocks in industries in a recession are not necessarily in the economy from which they can recover.
Invest in recession-proof stocks that have proven to perform sustainably during market setbacks, helping you hedge your portfolio and maximize returns. The spectre of an impending recession may tempt you to forget high-volatility stocks such as the best penny stocks Canada has. Instead, start looking for recession-proof (or at least recession-resistant) investments to reduce your portfolio risk and emerge stronger from the storm.
Safe assets such as gold are known to gain momentum in recessions and major economic downturns as people switch from risky stocks to high-quality metals. Companies that are best placed to survive in this environment, if not thrive, are defensive stocks that provide products and services that people cannot live without.
With Apple’s 5G iPhone coming soon, it seems silly to talk about recession-resistant stocks. But the top 20 stocks to invest in during a recession are valuable to investors and consumers intense times. These are not just great stocks to hold until the US, and the global economies normalize.
There is no question that reliable Canadian companies and recession-proof Canadian stocks are critical to any investment portfolio. There is not much the market can do to ignore them. When the economy weakens, you want to own shares in quality companies because they have the best chance of keeping their share prices during a market correction.
If you do not hold Canadian safe and reliable stocks that many people who buy new shares do not have in their portfolios, you will face more volatility than you are used to. Nonetheless, we found it helpful to introduce two recession-proof Canadian stocks, one that you can put aside, forget and focus on earning more than any other part of your portfolio. One of the most substantial reasons for believing that what is happening now is since many of the stocks controlled by Canadian public companies are also among the best recession-proof stocks.
The integrity of many of these companies is likely comparable to investing in junk bonds during a market crash, provided they survive. For example, Barrick Gold Corporation is one of the most popular companies globally with an outstanding financial balance sheet. As a result, barriers sales increased 29.62% yearly, and EBITDA increased 49.03% yearly.
Despite a gross profit margin of 41.11% and a return on equity (ROE) of 11.75%, Barrick Gold Corporation is one of the most profitable gold stocks on the Toronto Stock Exchange.
Quarterly corporate profits increased by 60.9% yearly, exceeding the quarterly top growth rate of 14.1%. However, PepsiCo shares held their ground with average annual growth of 6% between 2008 and 2010.
PepsiCo has increased its annual dividend distribution from $1.35 in 2007 to $2.86 in 2010, increasing nearly 40% for those who care about dividends. In addition, church & Dwight improved its earnings per share from 2007 to 2009 due to pricing for consumer goods when that figure was not yet reached.
Once we understand the dominant companies’ size and market share, we can put forward a recession-proof thesis. Current CEO Jeff Harmening is optimistic about his chances as we enter a recession.
