These six stocks will be the first to rebound from the coming recession. In fact, we are probably already in a recession now, but that won’t be known until sometime in July. In any case, these rebound stocks will be the ones investors flock to first as it becomes clear that economic growth is returning.
These are high-quality companies, with good earnings prospects, brand names, and dividends that their earnings can more than cover their dividends.
Let’s dive in and look at these stocks.
|X||United States Steel Corp||$20.51|
|NECB||Northeast Community Bancorp||$11.19|
Market Cap: $1.861 trillion
This $1.86 trillion market capitalization stock has strong brand name qualities and very powerful cash flow. The fact is every computer tends to use either Windows, its Edge browser, Office software, and/or its Azure cloud platform offerings.
Microsoft proposed to buy game publisher Activision Blizzard (NASDAQ:ATVI) in January 2022 for $69 billion, the largest tech deal ever, but it may not close until July 2023, if ever. The FTC is now starting to act in a manner that could be interpreted as though it will scrutinize very carefully large mergers like this.
Nevertheless, analysts predict that revenue in 2022 will rise by 18% for the year ending June 30, 2022, to almost $200 billion. For the next year, they forecast a rise in sales of 14.4% to $227 billion. In other words, no recession here, although maybe a slowdown in growth.
The same is true with earnings. Analysts foresee EPS rising to $9.27 this year (June 2022) and moving 15.4% higher by June 2023 to $10.70 per share. That puts MSFT stock on a cheap forward P/E multiple of just 22.85 times at $248.65 as of June 15.
According to Morningstar.com, this is well below its historical average multiple in the last five years of 27.96 on a forward P/E basis. That is why MSFT could easily be one of the first stocks to rebound from the coming recession.
Alphabet (GOOG, GOOGL)
Market Cap: $1.443 trillion
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is due to rebound from the coming recession possibly sooner than the others on this list. The main reason is that the company has announced it will do a 20-for-1 stock split. This will take effect on July 15.
Although this does not mean anything from a financial and mathematical standpoint, it often brings about a higher price. For example, at today’s price of $2,194.8 for GOOG stock, the new price will be 1/20th of that, or $107.19 per share.
That means that smaller investors can more easily buy the shares, in that one share only costs $107.19 rather than $$2,194.8. American investors like to own whole shares, in part because dividend payments are typically fairly stable on a per-share basis.
In addition, this makes it much easier to purchase options, since one contract for 100 shares represents just $10,719. Now it will be easier, for example, to do a covered call play or an out-of-the-money short put play to earn income on GOOG stock.
On top of that analysts still forecast that earnings will rise in the year ending December 2023 by 19% to $133.35 per share. That puts the stock on a forward multiple of just 16 times. According to Morningstar.com, this is well below the 26.4 forward P/E multiple average for the past 5 years.
The Coca-Cola Company (KO)
Market Cap: $257.292 billion
Coca-Cola (NYSE:KO) is the ultimate brand name icon company and its revenue and earnings are forecast to grow incrementally from $41.9 billion in 2022 to $44.05 billion in 2023. Moreover, analysts forecast earnings growth from $2.37 in 2021 to $2.47 in 2022 and $2.65 in 2023.
This puts KO stock on a forward P/E multiple of just 22 times. This is below the historical average of 23.35x for the past five years. This implies that KO stock is now cheap.
Once the recovery from a recession takes place it is highly likely that Coke volumes will increase around the world. The stock’s valuation will likely also be rated higher.
United States Steel Corp (X)
Market Cap: $5.355 billion
United States Steel Corp (NYSE:X) — Some of the first stocks to rebound from a recession are those in highly cyclical industries such as steel, mining, and industrial fabrication.
As such, U.S. Steel stock will start to reflect investors’ expectations of an inflection point in economic activity well before the end of a recession. The market will discount the future and before orders, sales and earnings turn up. Investors push up the stock price in anticipation of these events. As such, they can expect that this will happen with X stock sometime before the end of the recession.
So far, it is too early to expect it. But one way to play this is to start buying cyclical stocks like U.S. Steel during the darkest part of a recession.
For example, right now analysts now forecast that revenue will slide from $21.2 billion this year to $16.4 billion in 2023. They also see earnings per share falling from $10.76 per share to an EPS forecast of $3.64 in 2023. That raises the P/E ratio now from 1.9x to 5x in 2023.
In fact, the best time to buy a cyclical stock like U.S. Steel is when the P/E is very high. For example, by the end of this year, analysts may start forecasting earnings for 2024 even lower. That will raise its forward P/E. Look to buy one of these typical cyclical stocks at the worst part of a recession, when analysts are expecting the worst.
LyondellBasell Industries (LYB)
Market Cap: $33.6 billion
LyondellBasell Industries (NYSE:LYB) is a global chemical company that makes plastics and composites. Revenue and earnings for the company are forecast to fall over the next year.
For example, analysts now expect that sales will fall to $50.6 billion in 2023 from $52.58 billion in 2022. They also see a decline in EPS to $16.33 from $16.49 in 2022. That puts the stock on a forward P/E of 6x for 2023. I suspect that analysts’ forecasts will deteriorate as the recession wears on. That will raise the stock’s multiples.
But, just like other cyclical stocks, the best time to buy this stock is when its multiples are the highest. Right now the stock has a low P/E. When earnings fall, the P/E multiple will rise. That will actually probably be the best time to buy the stock — at its worst. This will discount a future rebound.
Northeast Community Bancorp (NECB)
Market Cap: $183.187 million
Northeast Community Bancorp (NASDAQ:NECB) is a White Plains, NY bank holding company with seven full-service branches in New York and three full-service branches in Massachusetts. Most of its loans are real-estate-related.
Its tangible book value per share (TBVPS) is significantly higher than today’s stock price. For example, its book value as of March 31 was $16.95 per share and the TBVPS was $16.91.
So at $11.19 on June 15, NECB stock is just 66% of its TBVPS. Upon liquidation or a sale at the TBVPS price, investors at today’s price would make an ROI of 53.0%.
In addition, NECB pays a dividend of 72 cents annually, giving it an annual dividend yield of $6.5%. Earnings forecast for 2022 at $1.15 more than cover this by about 60%.
That also puts the stock on a cheap forward multiple of just 9.6x for 2022 and 8.34x for 2023. That means that once a recession is over or the market forecasts this, this is one of the stocks likely to quickly rebound.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.