Top 5 US Stocks for a Recession

Top 5 US Stocks for a Recession

UPDATED May 31, 2023

  • Recessions are difficult times for investors and capital markets. These periods are characterized by a sustained economic contraction caused by a drop in economic activity. Businesses are impacted as demand, capital investment and consumer spending decline as a response to difficult economic conditions.
  • When demand and the velocity of expenditure trend downwards, earnings are usually heavily impacted and the consequences are felt in a souring share price. While these conditions pose difficulty for all businesses operating in this environment, some businesses offer some resistance relative to the rest of the market during these periods. Here are our answers to the question: which stocks are the best to invest in during a recession?

5 companies

Costco Wholesale Corporation, together with its subsidiaries, engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan.

Why COST?

Wholesale consumer staples providing favorable pricing for budget-conscious households.

  • Consumer staples like groceries, clothing and household goods will see very little change in their demand because they are vital to the lives of consumers. The top line of consumer staple retailers will be largely unaffected by economic recessions. Costco’s (NASDAQ:COST) operations should be fairly resistant to the pressures of an economic recession, providing consumers with the necessities they need at wholesale pricing. This should be favorable to Costco as consumers become more price conscious as household budgets tighten.

Rewards

  • Earnings are forecast to grow 8.76% per year

  • Earnings grew by 9.8% over the past year

Risks

  • Significant insider selling over the past 3 months

View all Risks and Rewards

Raytheon Technologies Corporation, an aerospace and defense company, provides systems and services for the commercial, military, and government customers worldwide.

Why RTX?

High military expenditure and lucrative government contracts keep revenue consistent.

  • Government expenditure on the military is usually high and remains consistent during economic recessions. Companies with lucrative government contracts should out-perform the market due to relatively unchanged levels of customer expenditure. Given global military spending has eclipsed US$2 trillion in real terms for the first time in history, governments will be hesitant to budge on defense expenditure even when pressure is placed on national budgets to ensure strategic advantage is not lost.
  • Raytheon Missiles & Defense, a subsidiary of Raytheon Technologies, has continued to secure lucrative contract awards over the last few months. Raytheon has managed to secure a US$867M Missile Defense Agency contrac and a US$624M U.S. Army contract to produce 1,300 Stinger missiles. This should give investors some peace of mind that the business remains strong during a tough economic climate.

Rewards

  • Trading at 23.7% below our estimate of its fair value

  • Earnings are forecast to grow 12.83% per year

  • Earnings grew by 31% over the past year

Risks

No risks detected for RTX from our risks checks.

View all Risks and Rewards

NRG Energy, Inc., together with its subsidiaries, operates as an integrated power company in the United States.

Why NRG?

Persistent demand even during tough economic conditions.

  • Much like consumer staples, electricity is a necessity for households regardless of the economic climate. The demand for electricity is relatively inelastic and so generators and suppliers will see relative strength compared to the rest of the market. Seeing as it’s one of the largest utility companies in North America, NRG Energy (NYSE:NRG) should see relatively little impact to its operations. Recently, analysts covering NRG Energy have actually improved their outlook for the remainder of 2022 , increasing revenue forecasts US$28B for the year. A testament to the expectation of continued demand from customers irrespective of the economic stresses that look to impact household budgets.

Rewards

  • Trading at 76.9% below our estimate of its fair value

  • Earnings are forecast to grow 27.73% per year

Risks

  • Debt is not well covered by operating cash flow

View all Risks and Rewards

Service Corporation International provides deathcare products and services in the United States and Canada.

Why SCI?

Consistent need for funeral services means consistent revenues during recessions.

  • Death is a certainty and this definitely does not change during recessions. Providers of funeral services and cemetery operators should not experience a noticeable change in overall demand for their offerings. Service Corp (NYSE:SCI), largest provider of funeral, cremation and cemetery services throughout North America has recently upped their full year guidance, which they attribute to more funeral services being performed and higher pre-need cemetery sales. If a recession occurs, revenue per funeral may decrease however this should be offset by the tailwinds of an aging population and recent acquisitions bearing their fruit.

Rewards

  • Price-To-Earnings ratio (19.6x) is below the Consumer Services industry average (23.2x)

  • Earnings are forecast to grow 7.29% per year

Risks

  • Debt is not well covered by operating cash flow

  • Profit margins (12.2%) are lower than last year (19%)

View all Risks and Rewards

3M Company provides diversified technology services in the United States and internationally.

Why MMM?

Recent asset sales allow capital to be committed to future growth.

  • During recessions, capital appreciation becomes a rarity. Decreased economic activity generally leads to a fall in earnings across the board and share prices suffer as a result. Dividend stocks usually withstand economic shocks better than growth stocks and so a company with a stable dividend stable will be an attractive option for investors seeking reduced share price volatility.
  • A study from S&P Global into the Case for Dividend Growth Strategies revealed that the Dividend Aristocrat index provided greater downside protection in tougher economic conditions, with an average monthly return of -7.29% during the 15 worst months for the market, compared to the S&P 1500 Composite at -9.58%. So in theory, 3M’s high dividend yield should provide shareholders with a buffer against market volatility in economic downturns.

Rewards

  • Trading at 35% below our estimate of its fair value

  • Earnings are forecast to grow 6.31% per year

Risks

  • Significant insider selling over the past 3 months

  • Large one-off items impacting financial results

  • Has a high level of debt

View all Risks and Rewards

Simply Wall St analyst Bailey Pemberton and Simply Wall St have no position in any of the companies mentioned.