Special Report

11 Growth Stocks to Outrun a Recession

If you’re worried about your investments and the possibility of a recession and extended bear market, you’re not alone.

History tells us that it can take investors years to recover from a bust.

Consider what happened after the dot-com bubble burst in 1999…

… And how Cathie Wood’s ARK Innovation ETF (ARKK) is following almost the same path more than 20 years later.

In both cases, deflating asset prices sent hundreds of growth companies into panic mode. Shares of some top ARKK stocks – from Block, Inc. (SQ) to Roku, Inc. (ROKU) to Zoom Video Communications, Inc. (ZM) – trade four-fifths below their peak. Meanwhile, ARKK’s No. 1 holding – Tesla, Inc. (TSLA) – is down around 30% year-to-date and is undergoing rounds of layoffs.

It’s like the 2001 “dot-bomb” all over again.

But growth-seeking investors looking to survive a recession – and even outrun one – have options. That’s because falling markets create unbelievable deals in some of the fastest-growing industries.

For example, following the dot-bomb crash, investors could have bought Microsoft Corp. (MSFT) for $20 a share… eBay, Inc. (EBAY) for $2 a share… Amazon.com, Inc. (AMZN) for $0.50 per share … Apple, Inc. (AAPL) for $0.25.

Ten thousand dollars invested in Amazon then would be worth $2.7 million now!

Moreover, post-crash upstarts – from cybersecurity firm Palo Alto Networks, Inc. (PANW) to Google parent Alphabet, Inc. (GOOG) – would capitalize on their competitors’ struggles to come out ahead.

Today, I see two of the same forces again at work.

Valuation. Earlier this year, at least 300 biotech firms traded below their cash values. Investors could theoretically have bought these companies for their cash while receiving a drug pipeline for free.

Startup Success. Younger companies are starting to encroach on consolidating industries like 3D printing and electric vehicle batteries.

(Remind you of 2001 yet?)

These forces are once again creating a perfect environment to buy high potential stocks for the long run.

In this report, I’ll show you how to capitalize on today’s market dynamics to pick the best post-recession stocks…

I’ll show you some high-growth industries that are marching forward even as the economy stalls…

And I’ll share my Top 11 Stocks to Outrun a Recession.

Picking the Amazons… and Avoiding the AOLs

So, how can investors find future winners now and sidestep stocks destined for the Wall Street landfill?

To answer that, let’s consider the growth stock winners of the 2001 “dot-bomb” recession:

  • Option Care Health, Inc. (OPCH), home therapy services: +1,934% in 2001
  • NetEase, Inc. (NTES), PC and mobile gaming: +1,664% in 2002.
  • Itron, Inc. (ITRI), smart grid systems: +735% in 2001.
  • CarMax, Inc. (KMX), used-car retailer: +477.5% in 2001.
  • Booking Holdings, Inc. (BKNG), parent of travel website Priceline: +343% in 2001.

At first glance, this seems like just a hodgepodge of names. How does a healthcare firm and a used-car company end up on the same list?

But look deeper, and it becomes clear that the winners of the post-2001 bubble all had one thing in common: business models that thrived, regardless of the economy.

These are firms that either 1) catered to belt-tightening customers or 2) had a product so essential that they’re virtually irreplaceable.

It’s no surprise that companies like Amazon eventually came out ahead of AOL’s media business. The former helped customers save money, while the latter was more interested in getting people to spend.

The same rules of growth investing still apply today. To create my list of 11 Stocks to Outrun a Recession, I took the top stocks from my Portfolio Grader and screened them for high earnings and revenue growth for the next three years.

These companies then go through a secondary test…

I ask myself, “Do they create an essential product that can outrun a recession?”

Only firms to which I can answer “yes” are included on the list.

These stocks include an implicit assumption that a 2022–2023 recession will look similar to 2001, where high asset prices ended in a short, shallow slowdown. Our strategy here is to find growth stocks with the potential for high returns, rather than hide cash in ultraconservative assets that risk melting away from inflation.

I use this assumption because the U.S. economy is in far better shape than many think. The United States is less dependent on energy imports than in the 1970s, making a 1973- or 1979-style supply-driven crash less likely.

Plus, financial leverage across households and banks is relatively low, and so a repeat of the 1980s/’90s savings and loan bust or the 2007–’08 Global Financial Crisis is highly unlikely.

When creating this group of 11 Stocks to Outrun a Recession, I split it into three categories – Tech Companies, Healthcare Companies, and Goods and Services Companies. Not only will it highlight the factors that help these three distinct sectors outperform during recessions. It also introduces concepts that will help you as an investor to build a well-diversified portfolio.

First, let’s dive into essential tech stocks – the “picks-and-shovels” plays that help other high-growth firms succeed. These are the tech companies most likely to weather a recession.

Essential Tech Companies

In mid-2022, Tesla CEO Elon Musk revealed how his high-flying electric vehicle (EV) firm had become just the latest company to suffer from the semiconductor shortage.

“The global chip shortage situation remains quite serious,” Musk said. “For the rest of this year, our growth rate will be determined by the slowest part in our supply chain.”

These hiccups have highlighted how essential some slices of the tech sector can become. A single EV can use more than 2,000 semiconductor chips, giving their producers an edge even during recessions.

Other critical tech subsectors also make the list, from 5G-related stocks to the makers of radio frequency identification (RFID) tags.

That’s why I’m showing you the following six tech companies. Each has passed through my rigorous screening process – and each creates a product that has few substitutes or helps other firms save money during recessions.

Stock to Outrun a Recession No. 1: Photronics

This Brookfield, Connecticut-based tech firm earns an “A” grade from my Portfolio Grader for its high growth and earnings scores. Analysts expect the company to average almost 70% earnings-per-share growth over the next three years.

Lifting the hood, it’s easy to see why.

Photronics, Inc. (PLAB) makes photomasks, an indispensable part of the semiconductor manufacturing process. Much like film negatives in old cameras, these photomasks function as a shield that allows chip wafer etching.

That’s made Photronics a top-notch growth stock to watch. Operating income rose 48% in 2021 on unprecedented demand and increased demand for high-end photomasks. The firm is also relatively resistant to mild recessions. Between 2000 and 2002, the company saw share prices rise 20% even as dot-com companies collapsed.

That said, there are some downsides. Photronics lags in the EUV (extreme ultraviolet) space that can produce chips smaller than 7 nanometers (nm). Competitors like Toppan have a multiyear head start there. And the company went through a near-death experience in 2008 after writing off $200 million of its European and Asian assets.

But for investors seeking growth at a reasonable price, Photronics offers a combination that’s hard to beat.

Stock to Outrun a Recession No. 2: Onsemi

Investors seeking direct exposure to semiconductors should consider ON Semiconductor Corp. (ON), known as Onsemi. The Phoenix-based company is the world’s second-largest maker of discrete power transistors – the building blocks of chips. It’s a highly concentrated industry that gives the three major players exceptionally large margins.

Onsemi is also a leader in the high-growth automotive image sensor market. Management reckons it has an 80% share in the market for advanced driver-assist system (ADAS) sensors, and a 40% market share in the overall automotive sensor market. As more semiautonomous vehicles hit the roads, investors can expect demand for the firm’s products to keep rising.

These factors have allowed Onsemi to grow extraordinarily fast. Revenues and earnings shot up by 28% and 330%, respectively, in 2021, and analysts expect another banner year in 2022. Revenue should rise 22% to $8.2 billion by the end of the year.

Earning revisions have also been trending in the right direction. Wall Street analysts have steadily revised their 2023 EPS estimates up from $4.46 in February to almost $5 in August. The company scores an “A” grade in my Portfolio Grader.

Stock to Outrun a Recession No. 3: Aehr Test Systems

Meanwhile, investors looking for more steady growth in chipmaking should consider Aehr Test Systems (AEHR), a “picks and shovels” play on semiconductors.

Aehr creates products that help reduce the cost of testing and perform reliability screening of integrated circuits and other devices. It’s a critical step that helps chipmakers detect defects and weaknesses to prevent costly failures.

In other words, more chipmaking means greater demand for Aehr’s systems.

The Fremont, California-based testing firm has ridden a wave of EV demand. Management believes EV semiconductor demand will grow by at least 30% each year over the next decade. After accounting for the effects of operating leverage, profits could triple within two years.

The downside of Aehr is the cyclical nature of its business. The high demand for its testing kit could disappear overnight if a mild recession turns into a deep one. Aehr’s historically low trading multiples reflect that fear.

But a mild recession will unlikely dent demand for chip testing solutions. In August 2022, the president signed the bipartisan CHIPS and Science Act – a law that will pour $52 billion into the U.S. chipmaking industry. With a renewed focus on domestic manufacturing, chipmakers  – and picks-and-shovels plays like Aehr  – will be the ones to benefit.

Stock to Outrun a Recession No. 4: Keysight Technologies

In 1937, Bill Hewlett and Dave Packard started a company in a little one-car garage behind 367 Addison Avenue in Palo Alto, California. The company, of course, eventually became Hewlett-Packard, a firm that would make everything from audio oscillators to personal computers.

Decades later, in 1999, Hewlett-Packard would create an independent company, Agilent Technologies, to house its non-PC business, which had taken a backseat to HP’s printer and computer units. Then in 2014, Agilent spun off its electronic measurement business into Keysight Technologies, Inc. (KEYS).

Since then, that spinoff-of-a-spinoff has become an unequivocal leader in the 5G space. Morningstar analysts consider Keysight Technologies the leader in communications testing and measurement solutions, and they observe that it has “the strongest and broadest communications testing capabilities in the market.” The Santa Rosa, California-based company outspends its nearest rival by 2-to-1 for research and development (R&D).

There’s also an ironic twist of history. Today, Keysight’s core products look surprisingly like advanced versions of the wave analyzers and testing kits that Bill Hewlett and Dave Packard pioneered in HP’s early years. It’s a business that’s booming even as HP’s legacy printer industry is in decline.

Keysight Technologies is now broken into three main businesses, each of which provides a wide range of products:

  1. Communications Solutions Group. Radio frequency and microwave test instruments as well as electronic design automation software tools.
  2. Electronics Industrial Solutions. Design verification tools, and general purpose, test and management products.
  3. Services Solutions Group. Repair, calibration and consulting services.

Each segment contributes significantly to Keysight’s primary business  – the communications testing market  – which makes up over 70% of revenues. The firm is the only player that can service the entire telecom sector, making it a vendor-agnostic play on 5G and other wireless technologies.

Wall Street analysts have been steadily revising their estimates upward  – a promising sign of greater gains to come. Street estimates now peg 2024 EPS at well over $8, and for revenues to reach almost $6 billion. As 5G (and 6G!) continues to develop, investors can expect more good news to come.

Stock to Outrun a Recession No. 5: Supermicro

Founded back in 1993,  Super Micro Computer, Inc. (SMCI), known as Supermicro, has been at the forefront of technological change, developing many firsts in the industry, including the first x86 server boards based on Orion semiconductors, the first server boards to support Intel Pentium processors, the first redundant cooling power supply, and the first dual Intel Xeon server – just to name a few!

Today, Supermicro is well known as a global leader in high-performance server technology solutions. The company continues to provide a wide range of products for managing data.

The Silicon Valley firm is also growing fast, earning it an “A” grade in my Portfolio Grader and a place on this list. Third-quarter revenue jumped 51% year-over-year to $1.36 billion, which topped analysts’ estimates for $1.32 billion. Earnings soared 210% year-over-year to $1.55 per share, compared to $0.50 per share in the third quarter of 2021. Analysts expected earnings of $1.12 per share, so SMCI posted a 38.4% earnings surprise.

Looking forward, Supermicro expects fourth-quarter revenue of about $1.44 billion, or 35% year-over-year revenue growth, and earnings per share between $1.51 and $1.69, or 86% to 108% year-over-year earnings growth. For its fiscal year 2022, Supermicro expects revenue of about $5.0 billion, or 41% annual revenue growth, and EPS between $4.53 and $4.71, or 82.7% to 90%, annual earnings growth.

In the wake of the positive third-quarter report and strong outlook, the analyst community has increased fourth-quarter and full-year earnings estimates by 60.2% and 42.1%, respectively, in the past two months. Positive analyst revisions typically precede future earnings surprises… so we should have something to look forward to.

Stock to Outrun a Recession No. 6: Pure Storage

Pure Storage, Inc. (PSTG) is a data storage firm specializing in solid-state all-flash technologies. It’s a system that can read and write data up to five times faster than traditional hard drives. (Think of what happens when you switch your PC from a traditional HHD to a solid-state drive.)

The demand for faster computing  – particularly block storage for financial transactions  – has put the Silicon Valley firm on a hypergrowth track. Revenues jumped by 30% in 2022 and the company could reach accrual-based profitability as soon as 2024. The firm now serves half of the Fortune 500 companies.

Pure Storage is also highly profitable on a cash basis (rather than an accrual-based one). In 2022, the company generated $410 million in cash while only requiring $102 million in investment. It’s a money-spinning operation that has helped double PSTG’s share price over the past five years.

All this makes the firm highly resistant to recessions. The company has built a $1.4 billion cash pile, placing it on strong financial footing. Demand for digital storage also tends to remain firm even during downturns, as cloud storage providers discovered during the  COVID-19 pandemic. Operating income for Amazon Web Services (AWS), for example, increased by almost 50% that year.

Pure Storage might not be the cheapest firm by traditional financial metrics. But its fast 70% earnings-per-share growth and solid business model make it a company to buy for a potential recession.

Essential Healthcare Companies

Option Health Care wasn’t the only healthcare winner to emerge from the 2001 “dot-bomb” crash.

The blue-chip medical device firm Boston Scientific (BSX) would jump 76% in 2001, while smaller firms like Integra LifeSciences (IART) would rise even further. An investor who bought IART in January 1999 would have seen an 8x gain by 2002.

These healthcare firms create must-have products and services, making them perfect companies for outrunning recessions. Compared to tech companies, healthcare companies are more conservative investments… but the risk/reward formula should still work in our favor here.

Get onboard with the two following fast-growing healthcare firms…

Stock to Outrun a Recession No. 7: Catalyst Pharmaceuticals

Catalyst Pharmaceuticals, Inc. (CPRX) is a commercial-stage biotech company focused on licensing, developing and commercializing medications to fight rare diseases. The company owns the rights to Firdapse, a treatment for Lambert-Eaton myasthenic syndrome (LEMS), and is actively seeking other drugs to fill its pipeline.

Catalyst’s business model is significantly lower risk than research-only biotech firms. Its revenues from Firdapse generated $60 million of free cash flow last year, and its stable financials gives the Coral Gables, Florida-based firm the ability to acquire other biotech firms if a recession sends valuations down.

In better times, investors might consider a more speculative biotech with plenty of drugs in its pipeline. These are companies that can grow 10X overnight with an approval from the U.S. Food and Drug Administration (FDA).

But with a looming recession over our heads, Catalyst’s cash flow is hard to beat. The company earns an above-average “B” grade for earnings surprises, and a solid “A” grade overall in my Portfolio Grader for its impressive sales growth and strong earnings momentum.

Stock to Outrun a Recession No. 8: Lantheus

Lantheus Holdings, Inc. (LNTH) is one of my favorite types of companies: a niche firm with plenty of positive earnings revisions.

The Massachusetts-based company is a fully integrated provider of imaging diagnostics, targeted therapeutics and artificial intelligence solutions. Its primary product are the dyes that medical professionals use to “see” the inside of human bodies. (Think of the injectable and inhalables that people use before an MRI test.)

These are critical technologies in hospitals and outpatient centers. Sales dropped just 22% during the height of the COVID-19 pandemic, even as thousands of elective surgeries were getting postponed.

Lantheus also owns Definity, the leading ultrasound-enhancing agent. The product is a sterile liquid that turns into an opaque suspension when activated, allowing doctors to use ultrasound to examine the heart.

The company’s dominance in these industries (Definity is reckoned to have an 80% market share) has helped Lantheus turn from a small player into a $5 billion firm. Shares are up more than tenfold since its listing in 2015.

And my quantitative system shows that Lantheus is likely to continue to outperform. The company earns a solid “A” grade in both earnings revisions and earnings surprises – in the second quarter, the company earned a non-GAAP earnings per share of $0.89, beating estimates by $0.19. No surprise that the firm earns an “A” grade overall.

Part 3: Essential Goods and Services Companies

Finally, investors worried about a more severe downturn should consider essential goods and service companies as well. No matter if the United States is in a boom or a recession, people still need to fill their cars with gasoline and buy groceries.

And here’s the good news:

In severe recessions, these hum-drum sectors can quickly turn into high-growth darlings. During the 2008 financial crisis, belt-tightening customers sent Costco’s (COST) operating profit up 30% within three short years. And upstarts from Etsy (ETSY) to Uber (UBER) would use the crisis to upend “mature” sectors, turning craft stores and taxi services into hypergrowth industries.

The following three firms should be among the goods and services winners following the current downturn…

Stock to Outrun a Recession No. 9: UFP Technologies

During the 2008 financial crisis, shoppers turned to e-commerce to help save money. Amazon’s revenues jumped from $15 billion in pre-crisis 2007 to a stunning $24.5 billion by 2009.

Today, increasing online shopping is creating new winners in the ecommerce space.

And that includes UFP Technologies, Inc. (UFPT).

The Woburn, Massachusetts-based company has long been a stalwart of the specialty packing material world. Medical packaging materials made up almost two-thirds of its revenues in 2021, with automotive packaging in second place up through 2019.

But e-commerce has helped push UFP onto a faster growth track.

Since 2020, UFP has seen its consumer packaging business grow almost 50% annually on demand for packaging for large and fragile items. The firm focuses on electronics, candles, wine, and other high-volume products that require next-day deliveries. Consumer packaging has overtaken automotive as UFP’s second largest segment.

That’s great news for investors seeking recession-resistant growth. UFP’s focus on the medical field gives plenty of downside protection, as the segment has been a consistent revenue generator.

Meanwhile, investors aren’t giving up on growth either, thanks to UFP’s potential in e-commerce solutions. Analysts expect the firm to average 42% earnings growth over each of the next three years, and the company earns high grades in both sales growth and earnings surprises.

Shares also trade for a reasonable 8X forward earnings, awarding UFPT a solid “A” grade in my Portfolio Grader.

Stock to Outrun a Recession No. 10: Titan Machinery

Titan Machinery, Inc. (TITN) opened the doors of two retail locations in Fargo, North Dakota, in 1980 in order to better serve its customers with merchandise, service expertise and industry knowledge.

Thanks to this dedication to those “who feed and build our world,” Titan Machinery has grown exponentially to more than 100 retail locations in the U.S. Upper Midwest and Great Plains regions and Europe.

At its dealerships, Titan offers popular farm and construction brands, including Case Construction, Case IH, New Holland Agriculture, New Holland Construction and CNH Capital. You can find everything from tractors, combines and front loaders to excavators, forklifts and backhoes – as well as the parts and resources necessary to keep all this equipment maintained and running.

Thanks to a resurgence in demand for its equipment and services, Titan Machinery has achieved strong results in fiscal year 2022. Trailing 12-month revenue is up over 40% year over year, and operating income has gone from $5.6 million to well over $170 million.

These strong results have also triggered a spate of earnings revisions. Between 2020 and 2022, analysts upped 2023 earnings per share estimates from $1.50 to almost $4.00. 2023 revenues are now expected to clock in at $2.3 billion, a 30% increase from 2021.

The company, still based in Fargo, also earns high marks in return on equity and free cash flow  – the signs of a healthy, growing business. With commodity prices in a temporary dip, the pullback is giving us a great opportunity to scoop up shares of another fundamentally superior stock.

Stock to Outrun a Recession No. 11: Enphase Energy

According to the U.S. Department of Energy’s Energy Information Administration (EIA), solar power jumped nearly 15% year-over-year in 2019. With the Inflation Reduction Act now signed into law, the government agency now expects almost 30% of U.S. energy to come from solar by 2050.

Enter Enphase Energy, Inc. (ENPH), a Fremont, California-based solar energy company that got its start in 2006.

Within five years of the company’s founding, Enphase Energy had developed and introduced the first microinverter system. Simply put, microinverters sit underneath solar panels and convert all the sunshine to electricity for homes and businesses. You could consider microinverters the “brains” of a solar system.

By September 2011, Enphase had shipped 1 million microinverters. Today, the company operates in 21 countries around the world, has more than 300 issued patents and has shipped more than 42 million microinverters globally. The company now has systems installed in 130 countries.

Enphase also is expanding into home energy solutions, becoming a one-stop shop for solar installers, EV charging and digital services. In August, the firm announced an investment in Lunar Energy, a startup looking to develop products for whole-home electrification.

These growth factors have helped Enphase earn an “A” in my Portfolio Grader in growth and earnings revisions… and an “A” grade overall. Analysts now expect the solar company to make almost $3 billion in revenue in 2023, more than 110% higher than in 2021. And 2023 earnings per share has been revised from under $4 per share in early 2022 to $5 today.

Plenty of fossil-fuel companies make my dividend and earnings lists today. But investors seeking to outrun a potential recession should consider Enphase, a growth company operating in a hypergrowth industry.

Outrunning Recessions With Growth Stocks

During the 2008 financial crisis, few investors were thinking about portfolio growth.

Instead, people were panicking, and many put their money into bonds… gold… commodities. These assets seemed like a good bet in the face of the world falling apart.

Yet, the returns from those assets paled in comparison to the gains from the top growth stocks of the time. For example, Emergent BioSolutions, Inc. (EBS) gained 413% in 2008 alone. Many others, like semiconductor maker Qorvo, Inc. (QRVO), would do even better in 2009. The high-performance radio frequency (RF) solution firm would jump 511% that year before rising another 3.5x by 2014.

That’s because growth stocks that provide essential goods and services remain one of the few “superweapons” investors have against recessions. These are innovative companies that are growing… seeking new markets… reinvesting… all while competitors are tightening their belts and sinking into the background.

It’s never easy to hold onto growth stocks during market turbulence, no matter how high their fundamental quality. But investors who do will come out ahead.

Now you have 11 of them.

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