The last two years were challenging as the Covid-19 pandemic impacted several sectors of the economy. More importantly, it induced some permanent changes in how the world lives. Investment themes have transformed, and investors are looking for recession stocks to buy for robust returns.
Entering into 2022, the good news was the pandemic was likely to become endemic. However, other headwinds that have cropped up since then. Inflation has been high, and this makes the case for multiple rate hikes. It remains to be seen how multiple rate hikes will impact the economy.
On the geopolitical front, things seem to have flared up more than expected. Russia has announced a military operation in Ukraine. In response, the European Union is looking at major sanctions. The factor of war and sanctions is likely to have a negative impact on gross domestic product (GDP) growth.
Overall, there are investment opportunities in all market conditions. However, it makes sense to be prepared for the worst. From the perspective of asset markets, it could be a recession.
Of course, the current recession probability is very low. However, given the market’s volatility, it’s important to consider going overweight on some low-beta stocks.
These stocks can help protect capital in current market conditions. Additionally, low volatility stocks in general have a robust dividend pay-out. This will ensure steady cash flows.
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Let’s talk about seven recession stocks to buy for strong returns:
- Pfizer (NYSE:PFE)
- Walmart (NYSE:WMT)
- Lockheed Martin (NYSE:LMT)
- Altria (NYSE:MO)
- Apple (NASDAQ:AAPL)
- Newmont Corporation (NYSE:NEM)
- Chevron Corporation (NYSE:CVX)
Recession Stocks: Pfizer (PFE)
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PFE stock, with a beta of 0.68, is among the top stocks to buy for a recession. Additionally, the stock has an attractive dividend yield of 3.5%.
For 2021, Pfizer reported robust revenue growth of 92%. However, excluding the impact of the Covid-19 vaccine sales, growth was 6%. Even for the current year, the company has guided for revenue of $100 billion. This would imply revenue growth of 23% on a year-over-year (YOY) basis.
The key point is the Covid-19 vaccine-driven growth helped Pfizer boost its cash position. This allows for aggressive investment in research and development (R&D). For the current year, Pfizer expects to invest at least $10.5 billion in R&D.
Pfizer also has a deep pipeline of drugs for various conditions. Currently, 10 products are in the registration phase with another 27 in phase three trials. The pipeline is likely to ensure healthy revenue growth sustains.
In the last two quarters, Pfizer has also pursued acquisitions. With a significant increase in financial flexibility, the company is looking at the inorganic route to further expand the product pipeline.
Overall, PFE stock looks attractive at a forward price-to-earnings (P/E) ratio of 7.5x. In a recessionary scenario, the stock is likely to be a strong performer.
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The U.S. economy is consumption-based, and a key part of consumption expenditure is retail spending. In a recession scenario, policymakers immediately focus on boosting retail spending. This makes retail stocks relatively immune to economic shocks.
WMT stock is among the top stocks to buy from the retail sector. Besides the macro factor, its low beta and a dividend yield of 1.7% makes the stock attractive.
It’s worth noting on a two-year stack basis, U.S. comparable store sales have increased by 15%. Omnichannel sales capabilities boosted sales, and services such as same-day delivery also contributed to growth. Sales gaining traction in the grocery segment is another positive.
While international sales have been depressed, Walmart has presence in high-growth markets like India. Over the next few years, international sales are likely to contribute to the overall growth momentum.
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For the 2022 fiscal year, Walmart reported $11.1 billion in free cash flow. This gives the company ample flexibility to continue with share repurchase and dividends. Overall, WMT stock is unlikely to deliver very robust capital gains. However, it’s critical for the portfolio to lower its risk and cash flow through dividends.
Recession Stocks: Lockheed Martin (LMT)
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LMT stock is another low-beta name worth holding in the portfolio in uncertain times. With rising geopolitical tensions, I would hold it in my core portfolio.
Recently, J.P. Morgan opined that LMT stock is likely to outperform during the Russia-Ukraine crisis. Even if the stock is sideways, investors benefit from a robust dividend yield of 2.9%.
It’s also worth noting global defense spending increased even during the pandemic. The sector is therefore somewhat immune to other macro factors.
Specific to Lockheed Martin, there are two reasons to like the stock.
First, Lockheed ended 2021 with an order backlog of $135 billion. Even in a recession scenario, this provides revenue and cash flow visibility for the next two years. The company has already guided for stable cash flows in 2022 and 2023.
Furthermore, with rising geopolitical tensions, the company’s order backlog is likely to increase. Lockheed has been focused on expanding international sales, and the company could see orders that stem from the crisis in Ukraine.
Overall, LMT stock has returned 15% in the last six months. Considering a forward P/E of 14.5x, there seems to be room for upside as funds flow into defensive stocks.
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MO stock is an attractive stock to buy from a valuation perspective. Being a low-volatility stock makes it worth considering in a recession scenario. MO stock trades at a forward P/E of 10.7. Additionally, the stock offers a dividend yield of 7.3%, which is sustainable.
Recently, an Administrative Law Judge concluded Altria didn’t break antitrust rules when it invested in Juul. With the news, the stock has seen some positive price action.
It’s also worth noting MO stock has been depressed as the markets focus on the business transformation. However, the core business remains the cash cow for Altria.
First, its cash flow will ensure dividends sustain. Furthermore, Altria has ample financial flexibility to invest in the non-combustible segment.
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Altria also has a 45% stake in Cronos (NASDAQ:CRON). Regulatory headwinds have impacted the cannabis sector. However, with hopes of Federal-level legalization of marijuana in the United States, there is a possibility of value creation from the stake.
Recession Stocks: Apple (AAPL)
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AAPL stock has been on an uptrend, with returns of 31.8% in the last 12 months. While the dividend yield is 0.5%, there is likely to be sustained growth in annual dividends. Considering this potential, AAPL stock is also not expensive at a forward P/E of 28x.
In terms of growth catalysts, I believe that iPhone will remain the cash flow driver. With the accelerated adoption of 5G, the iPhone segment growth is likely to remain robust.
At the same time, Apple is looking for diversification. As an example, the company’s services segment growth has remained strong. For Q1 2022, the segment revenue was $19.5 billion. On a year-on-year basis, the segment revenue growth was 24.2%. The wearable, home and accessories segment revenue for Q1 2022 was higher by 14% at $14.7 billion.
The key point is that multiple segments are likely to drive growth in the next few years. This will ensure that cash flows continue to swell. For Q1 2022, the company reported operating cash flow of $47 billion. This implies an annualized cash flow potential of $188 billion. Considering the cash buffer and cash flows, the company is positioned to increase dividends and share repurchase.
Newmont Corporation (NEM)
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NEM stock has a beta of 0.29 and offers a dividend yield of 3.3%. Inflation coupled with escalation in geopolitical tensions has caused gold to trend higher. In the last six months, NEM stock has moved higher by 19.2%. It’s likely the uptrend will sustain as funds flow into defensive stocks.
For 2021, Newmont reported revenue of $12.2 billion and an adjusted EBITDA of $5.9 billion. For the same period, the company’s free cash flow was $2.6 billion.
With gold trending higher, Newmont is positioned for EBITDA margin expansion and cash flow upside. This will translate into dividend growth.
Newmont also expects to reduce its all-in sustaining cost in the next few years. Even if gold remains sideways, the company is positioned for margin expansion. From an asset perspective, Newmont has ample reserves to ensure stable production through 2040.
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Therefore, NEM stock looks like a long-term value creator. With a cash buffer of $5 billion and a total liquidity buffer of $8 billion, the company has the scope to pursue further asset expansion. An investment-grade balance sheet adds to the positive factors.
Recession Stocks: Chevron Corporation (CVX)
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In general, a recession is negative for oil prices. However, with geopolitical tensions and inflation, it makes sense to consider an oil and gas stock for a defensive portfolio. My pick would be CVX stock for several reasons.
First, the company has a high-quality balance sheet with a net-debt ratio of 15.6%. An investment-grade balance sheet provides flexibility to invest in exploration and sustain dividends.
Further, Chevron has low break-even assets. In 2020, Brent slumped due to the pandemic. Even during that year, the company reported positive operating cash flows.
Talking about investments, Chevron has a five-year average reserve replacement ratio of 103%. Even with a healthy production profile, the company has managed to boost reserves through investments in high-quality existing assets.
It’s also important to mention that in 2021, Chevron reported operating cash flow (OCF) of $29.2 billion. Considering the trend in oil prices, OCF is likely to be higher in 2022. Potential cash inflows will also help Chevron meet its annual share buyback target of $3 billion.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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