The sell-off in U.S. stocks worsened this week, and on Tuesday the Dow Jones Industrial Average ($DOWI) shed almost 400 points for its worst day since March. In a noteworthy sign of market weakness, the index closed below its 200-day moving average for the first time since May. The Dow finished in the red yesterday, as well, even as the S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX) closed marginally higher.
Tech stocks have been hit hard and have pared gains considerably from their stellar first-half rally. The macroeconomic environment has worsened, and the recent rise in gasoline prices might also make matters worse.
Plus, the Fed has been quite unequivocal about its fight against inflation, and the September dot plot shows that FOMC members see fewer rate cuts in 2024 amid sticky inflation.
Recent Data Points Raise Recession Fears
Some of the recent data points in the U.S. have shown a worsening slowdown. For instance, the Conference Board’s September consumer confidence index was below what economists expected, and fell to a 4-month low of 103.
Also, the “Expectations Index” - which is based on consumers’ short-term outlook for business, income, and labor market conditions - fell to 73.7. According to The Conference Board, the index falling below 80 “historically signals a recession within the next year.”
The slowdown in China is also deepening, and the country’s stimulus hasn’t been to the scale that markets expected.
Amid the ongoing stock market sell-off and rising recession fears, investors might find solace in “recession-proof stocks” – a phrase that might sound like a contradiction in terms as stocks might be expected to fall during a recession.
However, some stocks tend to outperform in periods of economic slowdown. Think of it this way - no matter how bad economic conditions are, we as consumers can’t cut back much on certain pockets of spending, such as groceries, food, and medicine.
Here are the 3 recession-proof stocks that defensive investors can consider now.
1. Walmart Ranks Among the Recession-Proof Stocks
While the broader markets have fallen from their peaks, Walmart (WMT) is trading near its 52-week highs. I believe WMT ranks among the recession-proof stocks given its status as a discount retailer.
During the company’s fiscal Q2 2024 earnings call, Walmart’s CEO Doug McMillion said, “We see people across income cohorts come to us more frequently looking to save money on everyday needs” – a quote that probably best sums up why Walmart can boast “recession-proof” status.
Wall Street analysts are also bullish on Walmart, and the retail giant has received a consensus rating of Strong Buy:
Of the 30 analysts that cover Walmart’s stock, 21 rate it as a Strong Buy and 4 as a Moderate Buy. The remaining 5 rate it as a Hold. Walmart’s mean target price of $178.63 is roughly 10% above its current stock price.
While Walmart’s current valuation multiples are slightly higher than its 3-year average, I believe growth drivers like its investment in Indian e-commerce company Flipkart and growing e-commerce sales in the U.S. justify the valuations.
2. Pfizer: A Defensive Pharma Stock with Reasonable Valuations
While Walmart is trading near its 52-week highs, Pfizer (PFE) is languishing near 52-week lows. However, it stands out among the ranks of defensive stocks that could outperform in a recessionary environment.
Notably, Pfizer stock has underperformed ever since the COVID-19 pandemic subsided – which means that the company’s COVID-19 vaccine is no longer the kind of revenue driver it was in 2021 and 2022.
Wall Street analysts rate PFE’s stock as a Moderate Buy, and its mean target price of $47 is 46.9% above current prices. Incidentally, the stock even trades below its Street low target price of $38.
Meanwhile, with Pfizer’s valuation multiples now falling below pre-pandemic levels, and a dividend yield of over 5%, I believe it is among the stocks that one can add to a recession-proof portfolio.
3. Coca-Cola is Another Recession-Proof Stock
Coca-Cola (KO) – which, by the way, is among the top holdings of Berkshire Hathaway (BRK.B) – is another recession-proof stock. Demand for Coca-Cola’s products is usually not impacted much by recessions, and the company has shown good pricing power in recent quarters.
The Dow stock also has a stable and progressive dividend, and has increased its dividend for 61 straight years. While many companies either suspended or lowered their dividends in 2020 amid the COVID-19 pandemic, Coca-Cola actually increased its payout from $1.60 to $1.64.
Currently, the stock offers a 3.25% dividend yield. While the dividend yield might not sound that rich, it is still twice the S&P 500’s dividend yield, and better than rival PepsiCo (PEP).
Stocks like Coca-Cola that offer stable dividends can be a good option in a recessionary environment, as dividends are a much more consistent source of income than capital appreciation, which ultimately depends on the vagaries of the market.
Coca-Cola stock looks reasonably valued and trades at a next-12-month price-to-earnings multiple of 20.78x, which is a discount to its 3-year average.
Wall Street analysts are also quite bullish on the beverage giant, and have given it a consensus rating of Strong Buy. Of the 14 analysts covering the stock, 11 rate it as a Strong Buy while 1 calls it a Buy. The remaining 2 analysts rate it as a Hold. Coca-Cola’s mean target price of $70.07 represents a potential upside of more than 25% to current levels.
Overall, I believe that Coca-Cola is among the stocks that are largely recession-proof, and can outperform in a recessionary environment.
On the date of publication, Mohit Oberoi had a position in: PFE , BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
