Recession fears are strong, as economic growth slowed to 1.1% in the first quarter and the Federal Reserve's interest-rate hikes have begun to restrain economic activity.
So what kinds of stocks should investors pursue to protect themselves against recession?
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“Recession-resistant stocks are companies whose products consumers will continue to purchase no matter the economic climate,” Morningstar investment specialist Susan Dziubinski wrote in a commentary.
“In a slowing economy, consumers will generally still seek medical care and enjoy their favorite beverages and snacks,” she said. “They’ll also continue to pay for running water, electricity and gas.”
In addition, recession-proof companies tend to be financially healthy and highly profitable, “two qualities that are prized when economic times get tough,” Dziubinski said.
Recession stocks often:
-- land in Morningstar’s defensive Super Sector, which includes health care, consumer defensive, and utilities.
-- earn wide-moat ratings from Morningstar. A wide moat means the company is seen with competitive advantages lasting at least 20 years.
-- have low or medium Morningstar uncertainty ratings. That’s the uncertainty of Morningstar fair-value stock-price estimates. This rating indicates the predictability of future cash flows.
The List of Recession Stocks
Here are the 10 most undervalued stocks, based on Morningstar fair -alue estimates, that meet those three conditions. The stocks are listed in order of valuation, with the most undervalued (as of May 5) listed first.
GSK (GSK), the U.K.-based drug company. Morningstar fair value estimate: $54, with medium uncertainty. Wednesday afternoon stock price: $36.40.
Roche Holdings (RHHBY) , the Swiss drug company. Morningstar fair value estimate: $57, with low uncertainty. Wednesday afternoon stock price: $39.45.
Imperial Brands (IMBBY) , the U.K.-based tobacco company. Morningstar fair value estimate: $34, with medium uncertainty. Wednesday afternoon stock price: $23.90
Anheuser-Busch InBev (BUD), the beer company. Morningstar fair value estimate: $90, with medium uncertainty. Wednesday afternoon stock price: $61.60.
Bayer (BAYRY), the German health-care and agriculture company. Morningstar fair value estimate: $22.50, with medium uncertainty. Wednesday afternoon stock price: $16.
Estee Lauder (EL), the beauty products provider. Morningstar fair value estimate: $253, with medium uncertainty. Wednesday afternoon stock price: $200.40.
British American Tobacco (BTI), the British tobacco company. Morningstar fair value estimate: $47, with medium uncertainty. Wednesday afternoon stock price: $34.75.
Zimmer Biomet Holdings (ZBH), a medical equipment company. Morningstar fair value estimate: $175, with medium uncertainty. Wednesday afternoon stock price: $136.75.
Pfizer (PFE), the pharmaceutical company. Morningstar fair value estimate: $48, with medium uncertainty. Wednesday afternoon stock price: $38.25.
Medtronic (MDT), a medical device company. Morningstar fair value estimate: $112, with medium uncertainty. Wednesday afternoon stock price: $89.35.
Morningstar Analysis of GSK
“As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of health-care treatments,” writes Morningstar analyst Damien Conover.
“The company's innovative new product lineup and expansive list of patent-protected drugs create the wide moat.”
Further, “the magnitude of GSK's reach is evidenced by a product portfolio that spans several therapeutic classes,” Conover said. “We expect GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade.”
The author of this story owns shares of Pfizer and Medtronic
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