Many economists say a recession is likely by the end of this year. So which stocks can do well during a downturn?
Morningstar investment specialist Susan Dziubinski offers some guidelines.
“First, recession-proof companies typically provide goods and services that consumers will continue to pay for no matter what's going on in the economy,” she wrote in a commentary.
“For example, we're likely to continue to fill our prescriptions, enjoy our favorite beverages, and pay our electric bills, even in a recession. The health-care, utilities, and consumer defensive sectors are considered recession-resistant.”
Recession-resistant companies are generally financially healthy and highly profitable, Dziubinski said. “They usually have competitive advantages that allow them to maintain reliable cash flows over time in any economic climate.”
Valuation is important, too, especially in light of the market’s recent volatility, she said. Morningstar analysts say many defensive stocks are now overpriced. But these are three that they think are undervalued.
Anheuser-Busch InBev Beats Estimates
Morningstar analyst Philip Gorham assigns the world's largest brewer (BUD) a wide moat and puts fair value for the stock at $90. That's about twice recently trades just above $45.
The company beat his estimates of volume, revenue and earnings before interest and taxes growth in the second quarter and first half, Gorham wrote in a commentary.
“Latin America performed well, supported by the reopening of the on-premises channel in Brazil, while Asia was soft, [due] to the tighter covid-19 restrictions in China,” he said.
“The scale of the business and its strong relationships with its vendors make this a high-quality franchise.”
Roche: 'a Promising Strategy'
Morningstar analyst Karen Andersen gives the biopharmaceutical and diagnostic company (RHHBY) a wide moat and puts fair value for the stock at $55. It recently traded at $40.47, about 38% below that fair-value estimate.
“Roche's wide moat arises from its status as the leader in oncology therapeutics and in vitro diagnostics,” she wrote in a commentary.
“The firm has a promising strategy of combining its expertise in both areas to generate a growing personalized medicine pipeline, making use of companion diagnostics.”
Andersen expects Roche to register low-single-digit sales growth in 2022, at the high end of management's guidance.
Clorox: Revenue Above Prepandemic Level
Morningstar analyst Erin Lash gives the household-products stalwart (CLX) a wide moat and puts fair value for the stock at $160, 23% above recent trades above $129.
“The pandemic prompted consumers to scour the shelves for Clorox's fare, boosting sales,” she wrote in a commentary.
“And even as volume growth is decelerating, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products.”
The company’s revenue remains far above its prepandemic total, Lash said.
“This prowess is further evidenced by its disinfecting-wipes offering, which posted its fourth consecutive quarter of market share gains” in the most recent earnings report.
