The economy’s sagging. It shrank at an annualized rate of 0.9% in the second quarter, after a 1.6% contraction in the first quarter.
And many experts believe the Federal Reserve’s interest-rate hikes will throw us into recession. So what stocks might investors turn to as protection against an economic downturn?
Morningstar defines “recession-resistant stocks [as] stocks of companies whose products and services consumers will continue to purchase no matter the economic climate.”
The idea is that in a slowing economy, people will still go to the doctor, will stay pay for their utilities and will still consume their favorite food and drinks, Susan Dziubinski, director of content for Morningstar.com, wrote in a report.
Two key attributes of recession-resilient companies are strong financial health and strong profitability. Those “qualities are prized when economic times get tough,” Dziubinski said.
Morningstar's Criteria
Morningstar put together a list of the 10 most undervalued recession-resistant stocks covered by its analysts. Undervalued stocks are those trading below Morningstar analysts’ fair value estimates.
The firm defines recession resistant stocks as:
· Those that are in Morningstar’s defensive super sector, which includes healthcare, consumer defensive stock, and utilities.
· Stocks with wide Morningstar moats. These companies are financially healthy and highly profitable.
· Stocks with low or medium Morningstar uncertainty ratings. The uncertainty rating represents the predictability of a company’s future cash flows.
And it turns out that four of the ten names are companies that take advantage of human weaknesses such as drinking and smoking, sometimes known as sin stocks.
The List
Here’s the list starting with the most undervalued. Price-to-fair valuation ratios are as of Aug. 1.
1. Anheuser-Busch InBev (BUD), the beer maker. Price-to-fair-value ratio: 0.59.
2. Imperial Brands (IMBBY) , a British tobacco company. Price-to-fair-value ratio: 0.62.
3. Zimmer Biomet (ZBH), a medical device company. Price-to-fair-value ratio: 0.63.
4. Medtronic (MDT), another medical device company. Price-to-fair-value ratio: 0.72.
5. Gilead Sciences (GILD), a biotechnology company. Price-to-fair-value ratio: 0.74.
6. Roche (RHHBY) , a Swiss drug company. Price-to-fair-value ratio: 0.75.
7. GSK (GSK), a British drug company. Price-to-fair-value ratio: 0.77.
8. British American Tobacco (BTI), a British tobacco company. Price-to-fair-value ratio: 0.79.
9. Ambev (ABEV), a Brazilian beer maker. Price-to-fair-value ratio: 0.79.
10. Veeva Systems (VEEV), a cloud computing company focused on the pharmaceutical industry. Price-to-fair-value ratio: 0.82.
Morningstar’s Take on Anheuser-Busch InBev
“We continue to think … the scale of the business and its strong relationships with its vendors make this a high-quality franchise,” Morningstar analyst Philip Gorham wrote in a commentary.
“We expect the company to push through further price increases in the second half of the year.”
Morningstar’s Take on Imperial Brands
“The [company] unveiled a five-year strategic plan in 2021 that will concentrate investments both geographically and on emerging categories that are likely to become the largest profit pools in the future,” Gorham wrote in a commentary. “We think the plan makes sense because it essentially recognizes Imperial's place in the marketplace.”
