Five Stocks That Could Hold Up In A Recession

Suddenly, investors are looking for companies that can survive a possible recession. Corporations with high profitability and low debt seem a pretty good bet.

Most corporate chief executives, in a recent Wall Street Journal poll, said that a recession has either already begun or will begin in the next 12-18 months. I put the odds at about 40% this year and 60% next year.

Here are five stocks that I believe have the financial and operational strength to come through a recession in good shape. Each has achieved a return on capital of 17% or better in the past year, and has debt equal to 10% of stockholders’ equity or less.

Moderna (MRNA), based in Cambridge, Massachusetts, burst into the public’s consciousness when it developed a vaccine against Covid-19, first approved in early 2021.

Modern’s revenue was a mere $60 million in 2019. In the past four quarter it was more than 300 times larger, $22.6 billion. Many traders figure that, as the Covid pandemic eventually wanes, so will Moderna’s revenue. That’s why the stock trades at the paltry multiple of four times earnings.

I would bet the other way. The company’s executives think its messenger-RNA technology can be applicable to additional diseases. The upside is huge if they are right.

It’s been years since I owned TeradyneTER
, which makes semiconductor test equipment. But I’m taking another look.

Based in North Reading, Massachusetts, Teradyne has averaged 12% annual revenue growth for the past decade. It has shown a profit in 12 of the past 15 years. Its return on invested capital was more than 52% last year, and 34% last quarter.

It’s natural for investors to worry about feast-and-famine cycles in the semiconductor industry. The industry has seen plenty of those. But right now there is a worldwide shortage of semiconductors, so I expect Teradyne’s profits to stay strong.

I recommended Logitech International SA (LOGI) a year ago and it did terribly. But the Swiss maker of computer peripherals (keyboards, mice, webcams and the like) has a superb record of profitability.

LOGI’s return on invested capital has been above 17% in 11 of the past 15 years. I consider anything above 10% good. Had you owned Logitech stock for the past decade you would have almost quintupled your money.

When I recommended it a year ago, the stock was on the expensive side. But today it goes for less than 15 times recent earnings. A recession could dent sales for a while. But with no debt on its balance sheet, I think Logitech would hold up well.

Americans have steadily increased their consumption of chicken. In 1985 it passed pork in popularity, and in 1992 it passed beef.

Sanderson Farms SAFM
, based in Laurel, Mississippi, is the nation’s third largest chicken producer, with close to a 10% market share. Last year, it agreed to be acquired by a joint venture of Cargill and Continental Grain, for $203 a share.

That merger is on hold while the U.S. Department of Justice investigates it. Meanwhile, the stock has moved up to $208. Assuming Sanderson stays independent, I think it’s a good investment. Debt is only 1% of equity. The stock trades for only five times earnings.

What product could be more prosaic that refrigerator coils? Mueller IndustriesMLI
makes those, along with a wide variety of tubes, valves, heat exchangers and other forgings.

Mueller, based in Memphis, Tennessee, was founded in 1917 and has been profitable for at least 30 years in a row (as far back as my database goes). That includes the Great Recession of 2008-2009.

The Record

This is the 18^th column I’ve written about stocks with high profitability and low debt. My picks from a year ago did the worst of all 17 previous years, down 39%. The poorest performers were Turtle Beach, down 59%, and Logitech International SA, down 58%. Also in the red were Sturm Ruger, down 22%, and GentexGNTX
, which fell 17%.

By comparison, the Standard & Poor’s 500 Total Return Index was down 11.8%.

The long-term picture is better. Of the previous 17 columns, 11 showed a profit and 10 beat the index. The average one-year return on my picks has been 10.8%, versus 9.0% for the index.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Disclosure: I own Logitech personally and for most clients. I own Sanderson Farms and Turtle Beach personally and in a hedge fund I run.