Let me start by addressing the objection that’s likely being posed by many readers. Are there truly any recession-proof stocks? Well, recessions do pull almost every stock lower, so it’s very difficult to find completely recession-proof stocks. But there are stocks that perform fairly well during economic downturns.
And investors should be looking to buy those stocks now. Because depending on one’s outlook, we are either quickly headed toward a recession or we’re already in one.
The Fed ratcheted its benchmark interest rate target 75 basis points higher on Sept. 21. That hike was the third consecutive 75 basis point hike by the central bank, and the benchmark rate will likely rise above 4.25%. The Fed’s previous attempts to reduce inflation have drawn mixed results, prompting it to raise interest rates further.
However, the move could trigger additional, sharp declines by the stock market and a deep recession. As a result, investors should look to buy nearly recession-proof stocks in October.
|JNJ||Johnson & Johnson||$163.20|
Duckhorn Portfolio (NAPA)
I’ve never written about Duckhorn Portfolio (NYSE:NAPA) before. However, I think it’s interesting for a few reasons. First, data suggests that alcohol consumption increases in recessionary periods. One study shows that, in the 2008-2009 recession, total alcohol consumption increased even as rates of abstinence from alcohol increased. In other words, precedent suggests that those who drink tend to drink much more in a recession.
Further, wine is emerging as an interesting alternative investment alongside other luxury items such as fine art. The idea behind investing in luxury goods during recessions is that the demand for them does not drop much during economic downturns. Duckhorn Portfolio offers wines that cost between $50 and $200 per bottle. Its wines aren’t tremendously expensive, but they are definitely luxuries.
Duckhorn Portfolio’s most recent results indicate that the company is relatively mature, as its sales increased only 1.3% year-over-year to $91.6 million. That increase isn’t especially exciting for investors. However, it is a safe company with a firm business. For that reason, along with its status as a seller of a luxury product, I’d consider investing in NAPA stock.
O’Reilly Automotive (ORLY)
It’s fairly obvious why O’Reilly Automotive (NASDAQ:ORLY), which sells auto parts, should do well in a recession. That’s because, during the current economic downturn, Americans are keeping their vehicles for longer than they ever have.
Back in May, it was reported that the average age of vehicles in the U.S. had reached 12.2 years. That was a new record. The older a vehicle becomes, the more repairs it requires. So O’Reilly Automotive should benefit from strong demand dynamics.
Additionally, Americans are increasingly seeing their ability to save dwindle as inflation continues to pinch consumers. That increases the chances of them hanging on to older vehicles longer, raising the demand for O’Reilly Automotive’s products.
In late July, O’Reilly Automotive provided guidance for a 3% to 5% increase in its 2022 comparable store sales Fortunately for investors, analysts’ average price target still indicates that ORLY stock can rise much further.
Let’s begin with McDonald’s (NYSE:MCD) fundamentals. McDonald’s is growing at an impressive rate, especially for a company of its size. In its most recent reported quarter, the company’s global comparable sales increased 9.7% year-over-year while its U.S. comparable sales climbed 3.7% during the same period.
Those fundamentals suggest McDonald’s remains on firm footing. That’s a positive for investors. But investors must also consider McDonald’s trajectory in a recession. Fortunately, it is one of the better-known defensive stocks. MCD stock held its value during the 2008-2009 recession trading around $58 for the duration.
And over the last ten years, it has performed very well, providing 14% average annual returns for investors, not including its dividend. That dividend is extremely safe, having last been reduced in 1977.
Consider MCD stock for its performance, its inexpensive menu offerings that should perform well as purse strings tighten, and its dividend that is just about guaranteed.
Investors should seriously consider Kimberly-Clark (NYSE:KMB) stock to appease some of their recession concerns. Let’s begin with a simple argument that relies on price precedents for Kimberly-Clark.
Over the past three years, Kimberly-Clark stock has traded in a range around the $130 level. It has gone higher, but for the most part, investors can expect that it will remain at or above that $130 range. In fact, analysts’ average price target for the shares sits at $131.44.
The issue for Kimberly-Clark is one common to most businesses currently: higher costs. In fact, the firm reported that its costs increased by $405 million in the most recent reported quarter.
That has some investors worried and is evidenced by the average rating on KMB stock which is a “hold.” But at the same time, Kimberly-Clark beat analysts’ average EPS estimates in the quarter as well.
Apparently, the firm is handling those higher costs in an effective manner. I’d buy KMB stock on that notion and because it includes a quarterly dividend of $1.16. It’s a well-known defensive stock within a consumer staples sector that historically enjoys inelastic demand. For those reasons, KMB’s shares are worth considering.
Johnson & Johnson (JNJ)
The reasons to invest in Johnson & Johnson (NYSE:JNJ) are simple. In this case, as in others, simple is best. The healthcare sector is noted for its recessionary strengths. Healthcare, as a whole, has tended to outperform during recessions of the past. That will very likely be true this time around as well.
In fact, there’s already a lot of evidence supporting this notion. Just look at JNJ stock’s price in 2022. It has barely slipped, falling a minuscule 4.6% thus far. Analysts, on average, believe it can climb roughly $20 above its current price. Like any of the so-called dividend kings – companies that have raised their dividend for 50 or more years – also consider JNJ stock for the income that it provides.
Finally, consider JNJ stock because the company, like all successful firms, invests prudently. That truth is evidenced by its return on invested capital of 17.38%. That ROIC far exceeds the firm’s weighted average cost of capital of 5.83%. When ROIC exceeds WACC, value is created for shareholders.
That’s why JNJ remains steady in unsteady times and how JNJ has provided investors with a growing dividend since 1963.
Synopsys (NASDAQ:SNPS) stock is a semiconductor firm that is heavily invested in the evolution towards the internet of things. It markets itself as a provider of high-tech chips that power everything from self-driving vehicles to machine learning, to the internet of things, and more.
Investors should be interested in SNPS stock because of its fundamentals. In its most recent, reported quarter, the company posted revenue of $1.248 billion, up from $1.057 billion during the same period a year earlier. Synopsys also provided guidance for similar revenue in current quarter. It expects sales of between $5.06 and $5.09 billion for the full year.
Semiconductor stocks haven’t performed well in 2022. The PHLX Semiconductor Index has declined nearly 40% in2022. Synopsys looks like an outlier within the sector. because its revenues and net income increased in the first half of 2022 and in Q2.
As a result, its shares have only declined by 14% this year. It is riskier than the stocks in other sectors, but SNPS stock has the potential to be a chip stock that performs well in a recession.
Wall Street analysts, on aver age, have a “buy” rating on the shares. That alone is a strong signal as tech and semiconductor industries have been roiled by the swift changes in monetary policy.
Ulta Beauty (ULTA)
The case for investing in Ulta Beauty (NYSE:ULTA) stock relies upon the notion that demand for its products is relatively inelastic. Past recessions have yielded data suggesting that the demand for cosmetics remains relatively strong during recessions. More specifically, data shows that, during recessions, women will indulge in discretionary purchases that aren’t too extravagant. Among these purchases are lipstick and other cosmetics. this phenomenon has been referred to as the ‘Lipstick Effect’.
That notion seems to have been illustrated by Ulta Beauty’s recent earnings report. If you’re like me and believe that we’re currently in recession, then the fact that Ulta’s sales increased to $2.3 billion from $2 billion bodes well. That suggests that its beauty products are indeed performing well even as consumers continue to become increasingly stretched.
Additionally, Ulta Beauty’s revenues have grown very in the past few years. For roughly the firsts even months of 2020, the firm recorded $2.4 billion of sales. During the same period two years later the company reported $4.64 billion of sales.
It’s clear that consumers appreciate its product offerings. And data suggests that cosmetics benefit from inelastic demand, so buying ULTA stock is a wise choice.
On the date of publication, Alex Sirois did not have (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.