These 5 Top Stocks Are Set to Outperform in a Recession

The Federal Reserve is grappling with elevated inflation by taking a hawkish stance and raising interest rates. The threat of a recession is real, and many consider it inevitable. This is the bad news. The good news is that some stocks perform well no matter what, others perform better historically during economic difficulty, and others go on sale.

You may be wondering, why invest at all during a downturn? Studies show that staying invested produces much greater returns than trying to time the market. It turns out that missing just a few of the largest “up” days crushes long-term profits. And those rallies often come when we least expect them. The best move for long-term investors is to have a disciplined strategy and stay the course.

Recessions come about for various reasons, and each has unique aspects — including today’s economic slowdown. But no matter the cause, they generally result in stocks falling in price. Yes, it’s nearly impossible to predict an exact market bottom, but a dollar-cost averaging strategy can reduce risk. There are several tried-and-true methods to take advantage of this market drop:

  • Look for companies with recession-proof income that pay significant dividends, like prescription drugmaker AbbVie (ABVV -0.91%) and cell tower REIT AmericanTower (AMT 0.90%)
  • Find a company that benefits from sky-high inflation and has a history of outperformance during downturns, like auto parts supplier AutoZone (AZO 1.27%).
  • Sprinkle in solid growth companies whose stock has fallen out of favor, yet for which the secular bull case remains intact. Intuitive Surgical (ISRG -0.68%) and Palo Alto Networks (PANW -1.19%) are terrific examples.

Let’s find out a bit more about these five stocks that can outperform in a recession.

Sleep well at night with dividends

The prescription drug market is highly recession-proof. These products are primarily necessities, not luxuries. AbbVie is a leading developer, manufacturer, and marketer of pharmaceuticals that is best known for its Humira franchise.

Humira will soon face competition from biosimilars — biologic products approved because they’re highly similar to existing medicines (but not generic forms of the existing med) — but AbbVie has developed a tremendous portfolio. It produced over $56 billion in 2021 revenue with $35.5 billion in non-Humira sales.

The loss of some Humira revenue will be challenging, but the company has guided for over $15 billion in annual sales from its new drugs Rinvoq and Skyrizi by 2025, which should help fill the gap. The stock yields around 3.5% and has outperformed the S&P500 this year by more than 30%, as shown below.

ABBV data by YCharts

American Tower is one of the world’s largest real estate investment trusts (REITs) with 221,000 communication sites globally. A REIT enjoys certain tax advantages provided it returns 90% of its taxable income to shareholders as dividends.

Like AbbVie, American Tower provides a product critical to daily life — in this case, communications towers leased out to various radio and cellular services. Global data usage will likely continue climbing for a long time.

American Tower grew adjusted funds from operations (AFFO) per share at a compound annual growth rate (CAGR) of 13.8% over the past decade while its dividend rose at an even higher 21.5% CAGR during that time.

AMT FFO Per Share (TTM) Chart

AMT FFO Per Share (TTM) data by YCharts

The dividend currently yields around 2%. This is a terrific stock to buy and tuck away.

AutoZone outperforms during economic struggles

The prices of used and new vehicles have skyrocketed, and a detailed look at the reasons partially explains why. The bottom line is that supply-and-demand forces conspired to push prices out of the reach of many Americans. These folks need their current vehicles to last longer, and AutoZone’s parts for DIYers and professionals are in demand.

Same-store sales increased 2.6% year over year last quarter, on top of a 28.9% increase the year before. Management needs to manage rising costs but is confident the company will outperform in an economic downturn, as it has historically.

AZO Chart

AZO data by YCharts

As shown above, the company massively outperformed the market during the Great Recession and is gearing up for a repeat performance.

Sprinkle in some beaten-down growth stocks

Growth stocks have taken an absolute beating in 2022. Many posted terrific results and have favorable secular prospects. Nibbling at these now could be a smart move for long-term investors.

Robot-assisted surgery is gaining widespread adoption from reputable practitioners, including the Mayo Clinic. Surgical systems enable doctors to perform procedures using minimally invasive techniques. This reduces complications and recovery times, among other benefits. Intuitive Surgical is the dominating industry leader, with over 6,900 of its da Vinci surgical systems installed.

Intuitive is not the average growth stock. Let’s count the ways:

  1. It is highly profitable. The company posted operating and net income margins of 27% and 25%, respectively, last quarter.
  2. It has an arsenal of cash and investments on hand. $8.4 billion, a whopping 12% of the current market capwas on hand at the end of the last quarter.
  3. It has a wide moat. Intense regulations and high development and switching costs make the barriers to entry mountainous for competitors. This is evidenced by Intuitive’s near-80% market share.

Intuitive is trading at its lowest price-to-earnings ratio since the pandemic, possibly making this a terrific time for long-term investors to get greedy.

Cybersecurity is important to many CEOs. Cyberthreats and security needs are flourishing, and so is Palo Alto Networks. This network, cloud, and endpoint security company posted $1.4 billion in sales last quarter with a $6.9 billion backlog, an increase of 29% and 40% year over year, respectively.

The company values ​​growth over profits now, so investors shouldn’t expect earnings calculated according to generally accepted accounting principles (GAAP) yet. Palo Alto reports impressive cash from operations, $390 million last quarter, and non-GAAP (adjusted) profits, which foreshadow its future potential. Palo Alto stock trades more than 20% off its 52-week highs.

Continuing to invest in the face of market turmoil is tough, but the numbers don’t lie. Investing for the long haul in solid companies is the way to go.

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