There are several dark clouds on our horizon; we have already seen a market downturn, the yield curve has inverted, there is ongoing stress from inflation, the war in Ukraine continues, and the Fed has made a sudden step of a half-point rate hike. OUCH! Combined, these are all excellent indicators of a coming recession. In recessions, most stocks, including high-quality ones, get pulled down, but some stocks still outperform the S&P 500, which is what we want to find. The following are defensive stocks that have beat the S&P 500 during the last two (2008 and 2020) recessions.
The chip tester
Synopsys Inc. (SNPS)
It outperformed the S&P by 70% in 2020 and 9.9% in 2008.
Synopsys makes a platform for engineers to design and test semiconductors and other software applications. The secular growth-semiconductor-market has demand from a wide array of sectors, so design and testing services stay consistent no matter the market. Synopsys’ strong fundamentals will be of advantage; in an ever-complex world of electronic design and automation, this makes up 55% of the company’s 2021 revenue. CFRA sees a price target of $424 from the current $272 (all prices are as of May 16th, 2022)
Places to get everything
There are two kings for recession-proof shopping.
Walmart Inc. (WMT)
Outperformed the S&P by 5% in 2020 and 20.6% in 2008.
Love them or hate them, Walmart has thrived in economic downturns. Walmart has shoring up, making $16 to 17 billion in capital expenditures, $6 billion more than its historical average. Making these investments in supply chain improvements, omnichannel sales, alternative profits, and geographic mix and product improvements should pay off. With its e-commerce, automation, and technology improvements, CFRA sees another 3.2% growth in 2023 revenue and has a price target of $165 from the current $147.
Target Corp. (TGT)
It outperformed the S&P by 21.4% in 2020 and 7.6% in 2008.
The discount retailer is the “not Walmart” choice for many, and has undoubtedly outperformed the S&P during the last two recessions. Food staples cannot be foregone with a downturn happens, but other savings can be made through bargain hunting at Target. Target’s position as a next-gen omnichannel retail outlet allows it to gain market share and deliver continuous revenue growth for the foreseeable future. CFRA has a price target of $288, up from its current $217.
Two builders paradises
These are the first beneficiaries of Fed moves. One of the first moves that the Fed makes when a recession is apparent is to cut interest rates. This in turn lowers mortgage rates and, when combined with minimal leisure activities due to the COVID-19 closures, caused a 2020 housing market and home improvement boom. This ongoing boom has only been slowed by the strong labor market. Once supply chain issues are cleared, the two hardware companies will continue to thrive.
Lowe’s Cos. Inc. (LOW)
It outperformed the S&P by 17.7% in 2020 and 33.6% in 2008.
Lowe’s superior strategy makes it a long-term growth investment. As the supply chain issues resolve, the professional contractor segment will take up any slack left by the do-it-yourselfer who have reduced spending from inflation. CFRA sees a Lowe’s price of $275 up from its current $193.
Home Depot Inc. (HD)
It outperformed the S&P by 5.3% in 2020 and 23.9% in 2008.
Like Lowe’s, Home Depot also saw S&P outperformance in past recessions, even during the retail apocalypse that is expected to kill another 80,000 stores by 2025. HD’s 27% decline in 2022 makes it a buying opportunity and a potential pocket of outperformance. While supply chain disruptions and high lumber prices could keep HD challenged, it should still see revenue growth continue into 2023. CFRA sees a price target of $395, up from HD’s current price of $296.
Diversified health play
Abbott Laboratories (ABT)
It outperformed the S&P by 9.8% in 2020 and 33.6% in 2008.
Health is, in most cases, a recession-proof industry; this diversified healthcare company reaches into several segments, which is why it outperformed the S&P in both recessions. Abbot is expected to beat its peers in diversified health with its robust balance sheet, increasing market share, and dividend growth; not to mention its stranglehold on baby formula. Abbot’s COVID-19 test kit sales will grow near-term revenue, and its healthy product pipeline will fuel future growth. CFRA has an Abbott price target of $140, up from its current $108.
Having great utility
NextEra Energy Inc. (NEE)
It outperformed the S&P by 11.1% in 2020 and 12.8% in 2008.
This utility holding company is the parent of NextEra Energy Resources and Florida Light and Power. With stable and predictable cash flows and limited competition, utilities are considered a defensive investment and the target of capital flight that is recession-proof. NEE is particularly attractive, with $40 billion in renewable energy capital spending planned through 2024 to generate long-term earnings growth. CRFA has a NEE target price of $90, up from its current $70
All of these stocks have historical over performance in recessions. They have positioned themselves to be substantial investment choices for the near and long term.
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