[Editor’s note: This story was originally published in July 2018. It has since been republished in light of current market conditions.]
Today, few investors have a plan to invest in recession-proof stocks. With high economic growth and a tight job market, optimism remains high. However, downturns always follow such periods.
Even the most astute analysts do not know when such a slowdown will occur. However, the March 2009 low for the S&P 500 occurred over nine years ago. Since 1945, the average economic expansion has lasted just under five years. This factor in itself should indicate the economy is currently seeing the late stages of the current economic expansion.
For this reason, investors should have a plan in place to invest in downturn stocks. While such a shift will likely bring the S&P 500 down, some investors become wealthier in such expansions.
Contrary to popular belief, some stocks move higher during economic downturns as changing consumer habits create opportunity. These seven companies should prosper in such times.
Recession-Proof Stocks: Costco Wholesale (COST)
Costco (NASDAQ:COST) offers much to consumers during hard economic times. With the need to save money, people will eat in more. They will often buy in bulk and will still prefer high-quality goods. All of these factors work in Costco’s favor.
Moreover, while other retailers have struggled, Costco’s growth continues. Same-store sales have increased by almost 10% during the first half of 2018. However, this number matters little to the bottom line. Due to its pricing, nearly all of Costco’s profit comes from its memberships. Membership renewal rates have held at around 90% despite last year’s membership price increase.
Further, with new locations opening, and expansion into China starting in 2019, membership increases will continue. For this and other reasons, analysts predict net income average growth of almost 11.9% per year for the next five years.
In 2017, the sentiment that Amazon (NASDAQ:AMZN) would take over retail hit Costco and other retailers hard. However, over the last 12 months, the stock has seen steady growth. It now trades near all-time highs. With a forward price-earnings (P/E) ratio of around 28, the stock could appear a little pricey at these levels. Still, if a downturn causes a significant pullback, investors looking for recession-proof stocks should look at COST stock.
Recession-Proof Stocks: Walt Disney (DIS)
With millions facing unemployment or underemployment during downturns, they find themselves with more free time. This creates an opportunity for Disney (NYSE:DIS) to serve as one of the downturn stocks as they provide low-cost entertainment.
Many regard its content library as the best available. This coincides well with the coming launch of Disney’s streaming service. Disney has voiced its intention to offer a lower price than its peer Netflix (NASDAQ:NFLX). While many customers will get both services, those focused on access to the best content library at the lowest price will choose Disney.
This along with ESPN, Marvel, Lucasfilm, the theme parks and Disney’s other ventures continue to drive Disney’s profits higher. Analysts predict an average profit growth rate of 11.5% per year over the next five years. Despite high growth, the stock has struggled. It still trades slightly below its 2015 high of just over $120 per share. Many sold DIS as cable revenues started to fall.
Still, because of Disney’s switch to streaming, this creates opportunity. The forward P/E for DIS stock stands at about 14.8. This represents a very low multiple for a stock seeing double-digit profit growth in most years. With the affordable entertainment Disney will offer, the profit growth for DIS stock should remain robust regardless of how well the economy performs.
Recession-Proof Stocks: Dollar Tree (DLTR)
Of all recession-proof stocks, perhaps none define the category better than Dollar Tree (NASDAQ:DLTR). As an extreme discounter, the store holds a continuous appeal to lower-income consumers and for those who want to keep spending to a minimum. During a downturn, this draw also attracts those who would regularly shop at higher-end stores during better times.
However, even during these better times, DLTR stock has enjoyed average growth at about 16% per year over the last five years. Analysts believe growth will still hold at about 13.4% per year on average for the next five years. This growth will help it to compete with peers such as Dollar General (NYSE:DG) and Big Lots (NYSE:BIG).
Now could be a great time to buy DLTR stock, whether a downturn comes tomorrow or two years from now. Dollar Tree stock has fallen over 25% from its January high. This gives the stock a forward P/E of around 14. Hence, both a downturn and its predicted growth will serve as catalysts to push the stock back to its high and perhaps beyond.
The company operates over 14,800 stores in 48 states and five Canadian provinces. At a market cap of only $20 billion, Dollar Tree stands as a large company that will enjoy steady growth in the years ahead regardless of how the overall economy performs.
Recession-Proof Stocks: Spirit Airlines (SAVE)
Even during this booming economy, ultra-low-fare carrier Spirit Airlines (NASDAQ:SAVE) has become the fastest-growing U.S. airline.
Though airlines do not normally appear on lists of downturn stocks, SAVE stock could buck that trend. For one, cash-strapped customers who might have flown a different airline when they felt wealthier, will turn to Spirit more often. Moreover, higher-end airlines would have to cut back service in more crowded airports. This could serve as an opportunity to take more market share at airports with little room to expand.
The airline also continues its expansion in South America and has yet to tap the Canadian market. They are also looking at adding regional jet types to their fleet. They fly only certain types of Airbus aircraft currently. Adding a regional jet would allow them to expand to smaller domestic markets presently overlooked by discount carriers.
Despite a temporary growth setback from having to pay pilots more, analysts expect the fast growth pace to resume. The stock trades at a forward P/E of about 10.1. This stands only slightly higher than peers JetBlue (NASDAQ:JBLU) and Southwest (NYSE:LUV).
All three airlines look appealing from a growth and valuation standpoint. However, most expect Spirit to see the highest growth rate. With the ultra-low fares, high growth and the potential to expand, Spirit can prosper in almost any economic environment.
Recession-Proof Stocks: Molson Coors (TAP)
Molson Coors (NYSE:TAP) and its peers have faced challenges as consumers increasingly turn to craft beers. Others have turned to wine and spirits, or away from alcohol altogether.
During the last recession, consumption of mainstream beers fell as consumers turned to craft beers. The company saw the writing on the wall. They set out to acquire multiple craft breweries in various regions of the country. Some, such as Blue Moon and Leinenkugel, sell nationally. Other brands, such as Hop Valley or Revolver, come closer to the “microbrewery” concept, selling only in select regions of the country. This leaves Molson Coors with a wide variety of products to sell to both the low-end consumers and those who want to enjoy a “luxury” craft brew as they drown their sorrows during a downturn.
The trend toward cannabis legalization could also benefit TAP stock. Spirits producer Constellation (NYSE:STZ) bought a stake in Canadian weed company Canopy Growth (NYSE:CGC) last year. Many believe TAP is eyeing a similar stake in a cannabis company. If true, this could also bolster revenue and earnings, which would help TAP to prosper as one of the better downturn stocks.
The stock trades at a forward P/E of 13. TAP stock saw minimal profit growth over the previous five years. Still, analysts predict profit growth will come in at almost 7.7% per year on average for the next five years. A move into cannabis would likely increase that estimate. Whatever happens with the economy, investors will have what they need to relieve the pain available on TAP.
Recession-Proof Stocks: Teladoc (TDOC)
Healthcare equities tend to function well as recession-proof stocks. Even in a booming economy, the rising cost of healthcare has served as a source of worry for many Americans. However, Teladoc (NYSE:TDOC) appears ready to cut the cost of doctor visits. For $40, patients can receive a virtual visit from a doctor at any time via their PC or smartphone. This allows for treatment solutions at a lower cost without the wait.
Analysts estimate over 400 million doctor visits per year, about one-third of the total, could take place on such a platform. Teladoc holds well over 50% of the market share in telehealth. It expects to conduct between 1.9 million and 2 million appointments this year.
The growth potential remains enormous regardless of how the economy performs. However, unemployed workers often drop health insurance during downturns. Thus, TDOC could provide quick, life-saving treatments to those who might not otherwise be able to afford a doctor.
The company has invested heavily in improving diagnostics and taking this service outside the U.S. As a result, it has spent heavily, and profitability will not come in the foreseeable future. Also, with TDOC trading at more than 14 times sales, it has become an expensive stock.
However, revenue growth has approximately doubled every year since 2013. Analysts forecasts revenues to rise by over 70% this year and over 35% in 2019. With a majority of the market share, a $4.5 billion market cap and more than 99% of the potential market left to be addressed, TDOC stock should rise regardless of what happens to the economy.
Recession-Proof Stocks: T-Mobile (TMUS)
T-Mobile (NASDAQ:TMUS) and its peers are spending tens of billions of dollars over the next few years to upgrade to 5G technology. 5G promises to revolutionize the wireless industry and perhaps the tech industry as a whole. Tests indicate it will bring speeds between 10 and 60 times faster than 4G. This will improve wireless connectivity and bring the world apps and functions not possible in the 4G realm. One such application is connectivity to Internet of Things (IoT) devices. Others have yet to be imagined.
However, this places pressure upon T-Mobile, as well as AT&T (NYSE:T) and Verizon (NYSE:VZ), to complete the 5G upgrade to stay relevant in the wireless business. Thus, the move to 5G will continue regardless of how the economy performs. Moreover, people must communicate in good times and in bad. This need will help T-Mobile and its peers as downturn stocks.
The high costs of the upgrade have drawn away stock investors. Hence, the forward P/E stands at under 19. However, analysts predict profits will grow by over 17% this year and 22% next year. Moreover, the company will begin reaping the benefits soon. T-Mobile expects to launch 5G in 30 markets by early next year.
Also, assuming they can complete the long-desired merger with Sprint (NYSE:S), T-Mobile will see a broader customer base and only two direct competitors in the U.S. With or without Sprint, and with or without a booming economy, T-Mobile and TMUS stock will move ahead at full speed.
As of this writing, Will Healy is long TDOC stock. You can follow Will on Twitter at @HealyWriting.