When the country enters a recession, the stock market often takes a beating. But there are some stocks that do better than others when there’s an economic contraction. Keep reading to learn about some stocks that may fare better when times are tough.
What Is a Recession?
First, let’s define a recession. While there is no specific definition of a recession other than a decline in economic activity, the common definition is two consecutive quarters (or more) of decline in gross domestic product, or GDP. Stock prices typically fall during a recession, so it’s a good time to look for stocks that traditionally remain strong even when GDP falls.
What Stocks Do Best in a Recession?
The types of stocks that do better in a recession are typically those of companies that provide goods and services that are less price sensitive — in other words, things that people will buy even if they increase in price, or if the consumer fears losing their job.
These fall into industries like consumer staples, healthcare, utilities, grocery stores and discount retailers.
What Is the Safest Stock During a Recession?
Only hindsight can determine which stocks are safest during a recession, but here are some in each category that tend to fare well.
There are certain things that consumers will continue to buy regardless of their economic situation. And some consumer staples companies benefit from the tendency for people to eat at home rather than going out to restaurants. These two consumer staples stocks are well positioned in the event of a recession.
The Coca-Cola Co. (KO) is the largest nonalcoholic beverage company with operations worldwide. It currently has a recommendation rating of 2.2 out of 5 (with 1 being “strong buy” — the best rating). According to Yahoo Finance, out of 25 analysts who’ve made a recommendation for July, 11 rate it a strong buy or buy, and 13 recommend holding the stock. One analyst rates it an underperforming stock.
The Kraft Heinz Co. (KHC) is a food product conglomerate in which Warren Buffett’s Berkshire Hathaway has a large position. In June, 18 out of 23 analysts following Kraft Heinz recommended holding it, and just three rated it a strong buy or a buy. In July, however, 10 analysts recommend it as a buy and four as a strong buy.
While cosmetic and elective healthcare procedures may be postponed during times of recession, the need for medical care is ongoing. Medical products and supplies, health insurance and medical equipment are all needed, regardless of the state of the economy. These companies should fare well in recessionary times.
Johnson & Johnson
Johnson & Johnson (JNJ) is the largest healthcare firm in the world, comprised of pharmaceutical, consumer, and medical devices and diagnostics divisions. As of July 15, the stock was trading at $178.23 with a one-year target estimate of $190.00. On a scale from 1 (strong buy) to 5 (sell), the analyst consensus is 2.3.
UnitedHealth Group Inc. (UNH) provides health insurance to 50 million members. UNH is trading very close to its 52-week high right now, which is very unusual in this bear market. The stock price on July 15 was $529.75, and the one-year target estimate is $565.55.
Not only are utilities necessary, but most utility companies are monopolies in the areas they serve. This makes utility companies classic “defensive” stocks — that is, stocks that do well when the rest of the market doesn’t. Consider these utility stocks.
NextEra Energy Inc. (NEE) is the parent of Florida Power & Light Co. Its renewable energy segment generates and sells natural gas, nuclear, wind and solar power throughout the U.S. The stock traded at $78.71 on July 15 and has a one-year target estimate of $91.83. The analysts’ recommendation rating is a 2, or “buy.”
Duke Energy Corp. (DUK) is one of the country’s largest energy holding companies, delivering electricity to nearly 8 million customers and natural gas to more than 1.5 million. If you’re looking for income, Duke is a good choice, with a 3.74% dividend yield.
Groceries are a necessity, and grocery stores sometimes do better when the economy does worse since people tend to eat at home rather than going out to dine at restaurants. These grocery store stocks are worth a look.
Albertsons (ACI) is a food and drug retailer with over 2,200 stores in 34 states under brands like Albertsons, Safeway, Jewel-Osco, Shaw’s, United Supermarkets and more. The company just declared a dividend of $0.12 per share, payable on Aug. 10 to shareholders of record as of July 26 of this year.
Kroger (KR) had fiscal year 2021 sales of nearly $138 billion, making it one of the world’s largest food retailers. The stock has a dividend yield of 2.18% and a one-year price target estimate of $54.88, compared with its July 15 closing price of $47.75.
In a recession, consumers are always looking for a bargain. Discount retailers tend to do well since they offer products people need at a good price. Here are two discount retail stocks to consider.
Costco (COST) is the largest wholesale club in the U.S. with over 800 stores. Costco stock closed at $522.95 on July 15 and has a one-year target estimate of $553.06.
Target (TGT) has over 1,900 retail stores and offers household goods, apparel, food and beverages, health and beauty aids, and more, and an increasing online presence. Although most analysts (18 out of 26) are currently recommending it as a hold, the stock has a one-year target price estimate of $186.68, compared with its July 15 closing price of $146.67.
What About Bonds?
Sometimes investors may ask, “What investments are recession-proof?” or “What goes up during a recession?” and the answer they get is “bonds.” This may or may not be true. Bonds typically move in the opposite direction of stocks, so they go up when stocks go down and vice versa. This is what makes bonds a good hedge for stocks — usually. But a recession is not the same thing as a bear market, which is when stocks drop.
Bonds, like stocks, are subject to the laws of supply and demand, and that is what governs their price. So, while bonds may be a good investment in a recession, don’t assume that will always be true.
Moving some of your investments into defensive stocks is a smart move when a recession is looming. Keeping an eye on economic indicators like GDP will help you know when to get in and out of certain positions.
Data was compiled on July 17, 2022, and is subject to change. Information on analyst ratings was sourced from Yahoo Finance.