As monetary policies remain tight, there is an increasing fear recession in 2023. While several sectors might be impacted, a recession is not necessarily bad news for all. In fact, there are many sectors where we can still find some of the best stocks for recession.
It’s important to understand why investors should not panic in a recession scenario. First, equities discount events in advance and it’s likely that the recession factor is priced in the market. Furthermore, policymakers shift stance in a recession towards expansionary monetary policies. The government, invariably, focuses on stimulus packages. These potential actions are good for the markets as it boosts liquidity in the financial system.
I would therefore focus on some of the best stocks for recession that can best index returns in the coming quarters. Most of the stocks discussed are low-beta stocks and ensure capital preservation and regular cash flow through dividends. Let’s discuss seven of the best stocks for recession.
Newmont Corporation (NEM)
Gold is already trending higher and I believe that the positive momentum is likely to sustain in a recession scenario. Newmont Corporation (NYSE:NEM) is possibly the best proxy exposure to gold. The gold miner has an investment grade balance sheet and strong cash flow visibility.
Newmont closed 2022 with a total liquidity buffer of $6.7 billion. For the period, the company’s net-debt-to-adjusted- EBITDA was 0.5x. The company also reported a healthy operating cash flow of $3.2 billion for 2022.
With gold trading above $2,000 an ounce, the operating cash flow is likely to be in excess of $5 billion for the year. This would imply higher investments coupled with increased shareholder rewards. NEM stock currently offers a dividend yield of 3.2% and I expect healthy dividend growth if the rally for gold sustains. Overall, with strong fundamentals, robust cash flows, and an attractive dividend yield, NEM stock is attractive.
Riot Platforms (RIOT)
It’s worth noting that gold and Bitcoin (BTC-USD) have been some of the top performing assets in the first few months of 2023. I believe that Bitcoin will surge higher in a recessionary scenario, backed by a weak dollar. That being said, BTC mining stocks like Riot Platforms (NASDAQ:RIOT) appear attractive.
A strong balance sheet is a key reason to like Riot Platforms. The company ended 2022 with zero debt and $230 million in cash. Further, Riot holds 7,058 Bitcoin in its balance sheet. High financial flexibility will support aggressive growth plans.
Riot has already been boosting mining capacity and expects capacity of 12.5EH/s by the second half of 2023. Last year, the company reported Bitcoin mining gross margin of 60.3%. Being a low-cost producer is another advantage for Riot. For the current year, healthy cash flows can be expected if Bitcoin remains in an uptrend.
It’s interesting to note that oil has recovered quickly from 2023 lows of $65. There are two reasons for this sharp recovery. First, OPEC and its allies recently cut production to ensure that price is supported at higher levels. Further, the recession factor is discounted in the price and a potentially weak dollar will be positive for energy prices.
Chevron Corporation (NYSE:CVX) stock has trended higher by 7% in the last six months. This is amidst volatility in oil price. I expect CVX to breakout on the upside in a recession scenario. Besides the weak dollar factor, investors will look for an investment grade balance sheet and healthy dividends. CVX stock is fundamentally strong and offers a dividend yield of 3.57%.
It’s also worth noting that Chevron reported operating cash flow of $47.5 billion in 2022. With low break-even assets, OCF will remain strong even if oil is in the range of $80 to $90 per barrel. This will ensure sustained dividends and continued share repurchase.
In general, investors look for defensive low-beta stocks in a recession scenario. Pfizer (NYSE:PFE), for example, is among the best in this segment and looks undervalued. PFE stock trades at a forward price-earnings ratio of 12.3 and offers a dividend yield of 3.9%.
As funds flow into safe stocks with an attractive yield, PFE stock is likely to trend higher. Of course, the pharmaceutical sector is relatively immune to economic shocks.
In terms of business development, there are two points to note. First, Pfizer has a deep pipeline of 110 drug candidates. The late-stage pipeline is attractive and will ensure steady revenue growth.
Furthermore, Pfizer has witnessed significant cash inflow from the sale of covid-19 vaccines. The company is utilizing the improved financial flexibility for acquisition driven growth. The company expects to add $25 billion in incremental revenue from business development deals by 2030. Therefore, the overall outlook for Pfizer is optimistic and I would remain invested at current valuations.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) also has a low-beta and offers an attractive dividend yield of 2.46%. With a forward P/E of 18, LMT stock looks undervalued and can trend higher as investors flee to safer stocks with an investment grade balance sheet.
It’s worth noting that Lockheed has been benefiting as geopolitical tensions escalate. My point is underscored by the fact that the company’s order backlog has swelled to $150 billion as of Q4 2022. On a year-on-year basis, Lockheed reported a 11% growth in backlog.
A healthy backlog provides clear cash flow visibility for the year and 2024. Last year, Lockheed reported free cash flow of $6.1 billion. Even if FCF remains stable at these levels, there is ample headroom for value creation.
From a growth perspective, Lockheed has been investing in new technology like hypersonics. Further, orders from Europe are likely to improve in the coming years. LMT stock would therefore remain attractive even after an economic recovery.
Costco Wholesale (COST)
Costco Wholesale (NASDAQ:COST) declined by 15% over the last 12 months. This does not come as a surprise with the retail sector being impacted by inflation. However, in a recession scenario, I expect a breakout to the upside for the stock.
It’s important to note that the U.S. economy is consumption driven with retail spending being a key component. To pull the economy out of recession, policymakers are likely to focus on boosting consumption spending. This will benefit retailers in a recession scenario.
I must also mention that Costco has been reporting decent numbers amidst challenges for the sector. For Q3 2023, the company reported 6.5% growth in revenue on a year-on-year basis to $54.24 billion. Potentially lower interest rates in the second half of 2023 or in 2024 will benefit Costco.
I like the fact that Costco generates $4.3 billion in membership fee annually. With a high renewal rate and warehouse expansion, growth in recurring revenue will support cash flows.
Barrick Gold (GOLD)
Barrick Gold (NYSE:GOLD) is another gold mining stock that I would buy and hold in a recession scenario. GOLD stock has edged higher marginally by 10% for year-to-date 2022. I believe that the best part of the rally for the stock is due in the coming quarters.
Barrick Gold has an investment grade balance sheet and high cash flow potential. The company ended 2022 with a cash buffer of $4.4 billion. Further, operating cash flows for the year were $3.5 billion. At current gold price, it’s likely that OCF will be exceeding $5 billion. This would imply healthy dividend growth.
The company is also attractive considering the asset base. Barrick ended 2022 with 76 million ounces in gold reserves. With strong financial flexibility, the company has clear cash flow visibility in the coming years.
I must also mention that the company has guided for an all-in-sustaining-cost of less than $1,200 an ounce. Assuming a scenario where gold is in a long-term uptrend, EBITDA margin expansion will be significant.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.