With concerns growing about the possibility of a 2024 recession, it’s prudent to tilt your portfolio in a more conservative direction as we head into 2024.
Currently, the 10-Year Treasury Constant Maturity Minus the 2-Year Treasury Constant Maturity chart displays a risky trajectory. But let me explain what this chart is first – it measures the difference between the yields of two U.S. Treasury securities with different maturities. The 10-2 year Treasury yield spread is often used as an indicator of the yield curve’s shape and the economy’s direction. A positive spread means that the 10-year Treasury yield is higher than the 2-year Treasury yield, which implies that investors expect higher inflation and greater economic growth in the future. Conversely, A negative spread means that the 2-year Treasury yield is higher than the 10-year Treasury yield, which implies that investors expect lower inflation and economic growth in the future. This yield curve is inverted right now.
That’s not inherently a bad thing. What is bad is when that inverted yield curve starts spiking back to normalcy again. This has been a prelude to almost every major recession, including the Covid downturn and the technical recession (two quarters of negative GDP growth) in Q1 2022 and Q2 2022. Right now, we do have a strong labor market to counteract these recessionary fears, but with the economy starting to digest the rate hikes, the labor market is softening.
Of course, predicting recessions is notoriously difficult, and it’s entirely possible the economy may surpass expectations in 2024. Nevertheless, adding some exposure to recession-resistant stocks seems sensible, given the uncertain macro outlook. At a minimum, these stocks can provide ballast to portfolios in choppy markets while still offering solid return potential over the long-run. Let’s dive in.
Flowers Foods (FLO)
If you’re hunting for stability, you can’t go wrong with a classic defensive name like Flowers Foods (NYSE:FLO). This baked goods stalwart boasts a track record of growing sales and dividends consistently over the years, even through the pandemic. The company’s brands like Nature’s Own and Dave’s Killer Bread enjoy tremendous consumer loyalty.
While costs are rising across the industry, Flowers has implemented smart pricing moves to offset inflation. And its strategy is working – the company just delivered 9% sales growth last quarter, trouncing estimates. For 2023, analysts see steady mid-single-digit top-line gains continuing. When folks get nervous, they still buy bread.
Additionally, with shares down 11% this year, investors can grab Flowers’ defensive profile at a reasonable price. At 20-times forward earnings and with a 3.7% dividend yield, FLO stock offers a tasty recipe for stability and income. This company’s fundamentals never go stale.
As economic outlooks cloud over, Clorox (NYSE:CLX) stands out as a relatively safe play in the consumer space. The company is hitting its stride in 2023 after a tough 2022 when waning pandemic demand and supply issues plagued performance.
But now, Clorox is back with a vengeance. Last quarter, the company grew sales by 12% behind brand powerhouses like its namesake Bleach and Glad. Management sees high single-digit earnings per share growth continuing next fiscal year. As management says, “we expect stronger growth in the front half as we continue to lap the two price increases that we have. And then in the back half, we expect it to get tougher for consumers. And right now, our expectation is a mild recession.” Thus, management seems prepared for the possibility of a 2024 recession, even if it is a mild one.
While CLX stock isn’t crazy cheap, defensive stocks seldom are these days. I’m happy to pay up for the safety and growth in times like these.
Sysco (NYSE:SYY) stock declined a little this year, but the rout feels overdone. Shares of SYY stock are down more than 20% in 2022, despite Sysco churning out record sales and profits last quarter. As the market leader in U.S. food distribution, Sysco enjoys immense scale advantages that breed stability.
Sure, food inflation poses challenges on margins, but Sysco boasts the pricing power to offset those headwinds. Analysts see revenue growth continuing at a 4.3% clip in fiscal 2023. And even after its steep haircut this year, they still see nearly 20% upside in the stock.
With its 1.9% dividend yield, Sysco gives investors a chance to gain stable exposure to defensive food distribution at a now-reasonable valuation. The crowd may have overreacted on this one, making now a good time to nibble.
Dollar General (DG)
When economic dread sets in, discount retailers like Dollar General (NYSE:DG) get their chance to shine. Catering squarely to budget-minded shoppers, Dollar General enjoys powerful recession resilience. Its incredible store growth and market share gains have continued this year, even as its stock sank over 37% amid margin pressures.
But don’t count Dollar General out. Analysts see a sales growing at a compound rate of roughly 12% annually over this decade. And they expect its beaten-down stock to power forward nearly 20%. DG’s extreme value focus never goes out of favor in tough times, especially when pennies get pinched.
With shares substantially discounted already, I think Dollar General looks like a relative bargain here for investors seeking safety. Its defensive attributes should cushion any portfolio in a downturn.
Duke Energy (DUK)
Do you know what sector gets dubbed “recession-proof” when economic anxieties strike? Utilities. Providers like Duke Energy (NYSE:DUK) enjoy very steady demand profiles and operate under the safety net of regulation. While Duke isn’t immune to impacts like weather and higher interest costs, its advantages abound.
Remarkably, Duke’s stock proved resilient last year, down just 2% compared to the broader market carnage. Now, DUK stock did fall nearly 12% this year, but still offers a secure 4.5% dividend yield. Duke’s growth outlook has dimmed near term, but analysts still see ~7% year-over-year earnings growth over the long haul.
Given that Duke has already taken quite the beating from this year’s storm, I think its upside/downside skew looks attractive. This utility giant should keep charging forward reliably for years to come, making it a cornerstone holding.
PepsiCo’s (NYSE:PEP) massive brand portfolio, including Pepsi, Frito-Lay, and Quaker Oats, provides immense consumer reach and recession resilience. This snacking and beverage empire simply has no rivals matching its scale and geographic diversification. Pepsi recently delivered 10.4% sales growth, continuing to gain market share as consumers scrambled for indulgent snacks to lift spirits.
Is PEP stock pricey at 24-times earnings? Sure. But safety has its price. And analysts still see 13% upside here.
Between its 2.8% dividend and steady mid-single-digit profit growth, I’m happily nibbling on Pepsi stock for ballast.
Like PepsiCo, Mondelez (NASDAQ:MDLZ) offers global snacking powerhouse status, making it a relatively safe bet if a 2024 recession strikes. With brands like Oreo, Ritz, and Cadbury under its belt, Mondelez reaches billions of treat-seeking consumers worldwide.
The company just delivered 17% sales growth in its Q2 results. Pricing actions fueled the gains, highlighting the loyalty its brands command. With MDLZ stock down modestly this year, its 22-times price-earnings ratio looks reasonable for a name of this quality.
Analysts see above-average earnings growth continuing for Mondelez, forecasting 15% upside with this consumer discretionary giant. It’s not the flashiest pick, but for investors seeking exposure to defensive sectors, Mondelez looks tasty at current levels.
On the date of publication, Omor Ibne Ehsan 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.