Seemingly everywhere you look, there are signs of a recession. The yield curve is inverted. There are negative interest rates everywhere across the globe. The 30-Year Treasury yield is at an all-time low. The U.S.-China trade war is escalating. Manufacturing activity globally is slowing. Corporate insiders are selling stock in bulk. Business confidence is eroding.
To be sure, I think a lot of this recession chatter is noise, and that most — if not all — of those “indicators” are red herrings. My base case scenario today remains for the U.S. economy to stay in expansion mode for the next 12 months, and for the S&P 500 to grind higher.
Still, one cannot ignore all those dour signs, and it may be smart to at least start preparing for the worst. As the old saying goes: prepare for the worst, hope for the best.
In the investment world, how does one prepare for a recession? It’s simple. Buy safe stocks with a track record of recession resistance.
Those stocks are tough to find. Most stocks don’t make the cut. Instead, most stocks plunge alongside the market during recessions. But, a few don’t, and the few that don’t are the ones that should be on your “prepare for the worst” radar.
Which stocks make the cut? Let’s take a look at five safe stocks to buy with recession resistance.
Safe Stocks to Buy With Recession Resistance: Walmart (WMT)
Alpha Generated in Last Recession: 58%
Why: Consumers migrate to discount retailers when money becomes tight.
The Thesis: The bull thesis on Walmart (NYSE:WMT) as a safe stock to buy in a recession is pretty simple.
Recessions hurt the U.S. consumer — they don’t outright kill U.S. consumption. As such, consumers still shop during recessions because they still need things like food, clothes and other essentials. The only difference in a recession is that they are doing this “essentials” shopping at discount retailers. Walmart is the king of the discount retail segment. Thus, when times get tough, consumers flock to Walmart to save money on their “essentials” shopping.
The result? Walmart’s numbers can actually improve during a recession, and WMT stock can actually move higher. Just look at the last recession. The S&P 500 peaked in October 2007, and bottomed in November 2009. During that stretch, the index lost about 56.5%. WMT stock gained 1.5% over that same stretch, thereby generating 58 percentage points of alpha over the market during the last recession.
Could the same thing happen during the next recession? Yes. And it probably will, given that Walmart has only extended its dominance in the discount retail game.
Alpha Generated in Last Recession: 50%
Why: Consumers buy cheap food when money becomes tight.
The Thesis: Much like the bull thesis on Walmart, the recession-proof bull thesis on McDonald’s (NYSE:MCD) is similarly simple.
During recessions, most people keep their jobs — the unemployment rate jumped to just 10% in the last recession. Wage gains fall flat, but consumers are still making incomes. Thus, in a recession, consumers don’t all become unemployed and broke — instead, most actually remain income-earners. That income just becomes tighter. When it becomes tighter, consumers start to look to cut down their expenses wherever they can.
One place to do so is on food. Consumers still have to eat. But, they don’t have to eat as expensively. The real world translation? During a recession, McDonald’s dollar menu starts to look a lot tastier.
That’s why McDonald’s can actually get a boost during a recession, and why MCD stock can generate tremendous alpha. While the market plunged more than 56% from late 2007 to early 2009, MCD stock fell just 7%. That represents an impressive near 50 percentage points of alpha during the last recession.
Will such out-performance happen again? Yes. McDonald’s has widened its lead in the discount QSR segment since 2007, and in so doing, it has become an even safer bet during a recession than a decade ago.
Planet Fitness (PLNT)
Alpha Generated in Last Recession: N/A
Why: Consumers still want to work out, but don’t want to spend as much on gym memberships.
The Thesis: Although there is no stock performance data to back the recession-proof thesis on Planet Fitness (NASDAQ:PLNT) — the stock wasn’t public during the last recession — the bull thesis on why this stock should generate big alpha during an economic slowdown is nonetheless compelling.
Now, more-so than ever before, consumers want to workout, look good and live a healthy lifestyle. Doing so comes with added costs, such as gym memberships. Those aren’t cheap. Gym memberships can cost anywhere from $40 a month, to several hundred dollars per month. But, Planet Fitness offers gym memberships for as low as $10 per month.
In an economic slowdown, consumers still want to workout, look good and live a healthy lifestyle. They just want to do it for less. How do they accomplish that? By canceling their 24 Hour or LA Fitness gym memberships and signing up for Planet Fitness.
How many people will do this? Not a lot. But, enough to where Planet Fitness’ numbers could actually improve during a recession, meaning that PLNT stock could actually move higher against a plunging market.
Flowers Foods (FLO)
Alpha Generated in Last Recession: 55%
Why: Consumers always need to eat, regardless of the economic backdrop.
The Thesis: When it comes to Flower Foods (NYSE:FLO), the bull thesis behind why to buy this stock in a recession is very straightforward.
Consumers always need to eat. But, during a recession, they become more selective about what they eat. That is, they cut back on the filet mignon, and bulk up on low-cost baked goods. Flower Foods is the second largest producer of packaged baked goods in the country, owning popular brands such as Nature’s Own and Wonder Bread. As such, this company actually gets a tailwind when the economy slows, because more consumers pivot into buying their low-cost baked goods.
The proof is in the numbers. During the last recession, the market plunged more than 56%. Over the same stretch that the market lost more than half of its value, FLO stock dropped less than a percent. That’s right — less than a percent. At the same time, FLO stock paid shareholders a 2% dividend yield.
Can this huge out-performance repeat itself during the next recession? I don’t see why not. All the fundamentals are the same, and FLO stock has a 3%-plus dividend yield now.
Ross Stores (ROST)
Alpha Generated in Last Recession: 58%
Why: When money becomes tight, consumers stop shopping at full-price retail stores and start shopping at off-price retail stores.
The Thesis: When it comes to Ross Stores (NASDAQ:ROST), the bull thesis on why to buy ROST stock during a recession is a slight iteration of the WMT recession-proof bull thesis.
That is, during tough economic times, money becomes tight. But, consumers still need to live, so they still need to buy things like food, clothes, so on and so forth. In a recession, they just migrate all that shopping from full-price stores to off-price stores. Ross Stores owns two of those off-price stores — Ross Dress for Less and dd’s Discounts.
Those stores did quite well during the last recession. Comparable store sales at Ross Stores rose 1% in 2007, then accelerated to 2% growth in 2008 and 6% growth in 2009. So, not only did Ross Stores hold up during the last recession, the company’s growth trajectory actually accelerated — likely thanks to the aforementioned consumption shift from full-price to off-price.
ROST stock reflected this out-performance. From late 2007 to early 2009, while the market shed more than half of its value, ROST stock rose nearly 2%.
This same out-performance should repeat come the next recession, mostly because Ross Stores remains one of the very few big brand names in the discount retail segment, and thus, will benefit from the broad full-price to off-price consumption shift.
As of this writing, Luke Lango was long WMT, MCD and ROST.