10 Stocks for a Recession

Recession fears continue to jostle the stock market this year. Companies are cutting jobs and jettisoning underperforming projects in the face of economic uncertainty. The latest reading of the Conference Board’s Leading Economic Index suggests that a recession will begin in mid-2023. (In fact, recession talk dominated the 2023 Morningstar Investment Conference last month.) Morningstar senior U.S. economist Preston Caldwell agrees that recession in the next 12 months remains a serious possibility, though he expects any recession to be short-lived.

Given the threat of a recession in 2023 (whether short-lived or longer-lasting), investors might consider adding recession stocks to a diversified portfolio.

What Are Recession Stocks?

Recession-resistant stocks are stocks of companies whose products and services consumers will continue to purchase no matter the economic climate. In a slowing economy, consumers will generally still fill their prescriptions, seek medical care, practice good hygiene, and enjoy their favorite beverages and snacks. They’ll also continue to pay for running water, electricity, and gas to heat their homes no matter where we are in the economic cycle.

In addition, recession-proof companies tend to be financially healthy and highly profitable—two qualities that are prized when economic times get tough. Such companies often have competitive advantages that allow them to maintain reliable cash flows over time, regardless of what’s going on in the economy. As a result, shares of these companies can be good stocks to own during a recession.

How to Find Recession-Proof Stocks

Recession stocks often share these qualities:

• These stocks land in Morningstar’s defensive Super Sector: This Super Sector includes industries that are relatively immune to economic cycles: healthcare, consumer defensive, and utilities.
• These stocks earn wide Morningstar Economic Moat Ratings: Stocks that have durable competitive advantages, or economic moats, are by their very natures more reliable than no-moat companies in terms of their businesses. Wide-moat companies are financially healthy and highly profitable, two qualities that are prized when the economy is rough.
• These stocks have Low or Medium Morningstar Uncertainty Ratings: The Uncertainty Rating represents the predictability of a company’s future cash flows. As such, we have a pretty high degree of confidence in our fair value estimates of stocks from companies with Low and Medium Uncertainty Ratings.

10 Recession Stocks to Buy

These were the 10 most undervalued stocks as of May 5, 2023, that Morningstar’s analysts cover and fit our definition of recession-resistant.

1. GSK GSK
2. Roche Holdings RHHBY
3. Imperial Brands IMBBY
4. Anheuser-Busch InBev BUD
5. Bayer BAYRY
6. Estee Lauder EL
7. British American Tobacco BTI
8. Zimmer Biomet Holdings ZBH
9. Pfizer PFE
10. Medtronic MDT

Here’s a little bit about each of these recession stocks, along with some key Morningstar metrics. All data is as of May 5, 2023.

GSK

• Price/Fair Value: 0.68
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Healthcare

GSK stock tops our list of recession stocks, with shares trading 32% below what we think they’re worth. GSK is one of the largest pharmaceutical and vaccine companies worldwide by total sales. Patents, economies of scale, and a powerful distribution network support the drugmaker’s wide moat rating, argues Damien Conover, director of healthcare equity research for Morningstar. Conover believes the market is not only underestimating the company’s strong growth and steady pipeline advancements but is also overly concerned by Zantac litigation, which already has been factored into our fair value estimate of $54.

Roche Holding

• Price/Fair Value: 0.70
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide
• Sector: Healthcare

Roche stock is 30% undervalued, according to our measures. Roche is a biopharmaceutical and diagnostic company that holds the leadership position in both oncology therapeutics and in vitro diagnostics; as a result, the drugmaker earns a wide moat rating, says Morningstar sector strategist Karen Andersen. Although foreign exchange and coronavirus headwinds led to a decline in first-quarter 2023 sales, growth benefited from strong sales of newer products and fading biosimilar headwinds. We assign Roche stock a $57 fair value estimate.

Imperial Brands

• Price/Fair Value: 0.71
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Consumer Defensive

The first tobacco company on our list of top recession stocks, Imperial Brands stock trades 29% below our fair value estimate. One of the world’s largest international tobacco companies, Imperial Brands benefits from tight government regulations that make barriers to entry almost insurmountable, says Morningstar director Philip Gorham. That and brand loyalty support the company’s wide moat. In a recent trading update, management indicated that business is tracking in line with forecasts—and our expectations. We assign Imperial Brands stock a $34 fair value estimate.

Anheuser-Busch InBev

• Price/fair value: 0.72
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Consumer Defensive

Anheuser-Busch InBev stock is a recession stock buy, trading 28% below our fair value estimate. The largest brewer in the world, AB InBev benefits from a significant cost advantage relative to its competitors, which creates meaningful barriers to entry and therefore provides a substantial moat, says Morningstar director Philip Gorham. The company has a history of buying brands with promising growth platforms and then expanding distribution while ruthlessly squeezing costs from the businesses, which contributes to its Morningstar Capital Allocation Rating of Exemplary. We think AB InBev stock is worth $90.

Bayer

• Price/Fair Value: 0.72
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Healthcare

Bayer stock is selling 28% below what we think it’s worth. The German healthcare and agriculture conglomerate has carved out a wide moat largely on the strength of its healthcare group, with key drugs in hemophilia and ophthalmology, as well as a consumer business that includes brands such as Bayer Aspirin and Aleve, says Morningstar director Damien Conover. The acquisition of Monsanto expanded the competitive position in the crop sciences industry—but also increased the firm’s exposure to litigation around potential side effects from glyphosate use. We give the stock a $22.50 fair value.

Estee Lauder

• Price/Fair Value: 0.75
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Consumer Defensive

Estee Lauder stock looks 25% undervalued according to our metrics. The world leader in the global prestige beauty market, Estee Lauder has carved out a wide economic moat thanks to its strong brands, entrenched relationships with retail partners, and cost advantages. Smart—and sizable—investments in omnichannel, marketing, and innovations that have helped the company manage inflation and supply chain disruptions, notes Morningstar senior analyst David Swartz. We think Estee Lauder stock is worth $273.

British American Tobacco

• Price/Fair Value: 0.76
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Consumer Defensive

British American Tobacco stock is cheap, trading 24% below our fair value estimate. One of the two largest listed global tobacco companies, it possesses a strong franchise and cost advantages, which have led to a wide moat rating, says Morningstar director Philip Gorham. Like others in its industry, British American Tobacco is diversifying into next-generation products that are most likely to win share of smokers, including vapes, heated tobacco, and oral pouches. We think British American Tobacco stock is worth $47 per share.

Zimmer Biomet Holdings

• Price/Fair Value: 0.79
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Healthcare

Zimmer Biomet stock looks cheap by our metrics, selling 21% below our fair value estimate. Zimmer manufactures orthopedic reconstructive implants. We award the company a wide moat rating thanks in part to the high switching costs that orthopedic surgeons would face if they transitioned to another company’s instrumentation, says Morningstar senior analyst Debbie Wang. Zimmer experienced robust growth during the first quarter of 2023; we estimate that full-year sales growth will fall near 4.7% after adjusting for foreign exchange headwinds, adds Wang. We think Zimmer Biomet stock is worth $175.

Pfizer

• Price/Fair Value: 0.80
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Healthcare

Pfizer stock appears to be about 20% undervalued according to our metrics. Prescription drugs and vaccines account for the majority of the drugmaker’s sales. A basket of diverse, patent-protected drugs power the company’s strong cash flows, which in turn provide Pfizer with significant competitive advantages in developing new drugs, says Morningstar director Damien Conover. Pfizer’s 1Q 2023 results exceeded our expectations, thanks in part to better-than-expected COVID-19 product sales. We assign this recession stock a fair value estimate of $48.

Medtronic

• Price/Fair Value: 0.80
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Sector: Healthcare

Medtronic stock is 20% undervalued. One of the largest medical device companies focused on therapeutic medical devices for chronic diseases, Medtronic (like Zimmer) enjoys high switching costs. Its intellectual property and relationship with physicians also contribute to its wide moat, says Morningstar senior analyst Debbie Wang. The U.S. Food and Drug Administration approved the firm’s next-generation insulin pump, which should positively affect results in fiscal 2024, she adds. We assign Medtronic stock a $112 fair value estimate.

How to Find More Recession Stocks to Buy

Investors who want to expand their search beyond this list of recession stocks can do a few things.

• Review Morningstar’s lists of all consumer defensive sector stocks, healthcare sector stocks, or utilities sector stocks to find ideas to investigate further.
• Create your own screen of recession stocks using the Morningstar Investor screener. You can limit your search to just one or two recession-proof sectors or even drill down to particular industries. You can widen your search beyond wide-moat stocks and dip into narrow-moat stocks, too. And you can also screen on stocks based on other valuation metrics that matter to you, such as price/earnings and free cash flow.
• Consider undervalued stocks from Morningstar’s Best Companies to Own List. The companies on this list don’t all cluster in recession-resistant industries. However, these companies nevertheless offer some certainty in terms of their cash flows and fundamentals—and they’re run by adept management teams. Best of all, their stocks are on sale and may therefore appeal to long-term investors looking for stocks to buy for a diversified portfolio, no matter the economic cycle.

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