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HomeMarket5 Stocks for a Recession.

5 Stocks for a Recession.

PepsiCo is among the companies that thrive in tough times.

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Joe Raedle/Getty Images

The U.S. economy is very close to entering a recession. The good news is that there’s a host of stocks that perform particularly well in that environment. 

The expectation right now is that a recession would take place some time in 2023. The main driver is that the Federal Reserve has been lifting interest rates to squelch high inflation by reducing economic demand. 

Strategists at 22V Research screened for stocks that can perform the best in a recession. The market usually prices in the economic trouble ahead of time, but risk to the market currently remains as many stocks have recently bounced higher. But a select group of stocks could not only outperform a volatile market, but could gain while the market and economy drops.

The strategist’s screen shows stocks that are most negatively correlated with U.S. Manufacturing Purchasing Managers Index. which usually declines as the economy slumps.  The
PMI
takes into account new orders, inventory levels, employment and other related happenings to show how much demand companies are preparing for.

The reason isn’t a coincidence. These stocks are mostly in defensive sectors that don’t see much of a hit to sales and earnings when consumers and businesses reducing spending. They are also mostly high-quality stocks. That means their earnings overall are stable, either because they’re in defensive sectors or because they have high profits margins, so any hit to sales is unlikely to cause the company to come close to losing money. Often times, quality companies also have strong balance sheets with tons of cash that helps them weather any hit to earnings. 

Here are five stocks on the screen. 

Dominion Energy
(D) has a negative 61.1% correlation to the PMI. Dominion is a utility provider and households and businesses must spend on power and electricity no matter the economic conditions. The stock’s beta in the past year, or its volatility relative to the broader market’s volatility, has been 0.44. Anything below 1 is less volatile than the market, and Dominion’s low beta reflects stable earnings. 

Kellogg
‘s (K) correlation to the PMI is negative 55.3%. The seller of cereals, snacks and other grocery items doesn’t see a large hit to sales when consumers pull back on spending. Sales of $15.54 billion and earnings per share of $4.13 expected for 2023 have consistently risen, though the pandemic and all of the cost inflation companies have dealt with, from about $13.5 billion and $4 in 2019. 

PepsiCo
(PEP) has a negative 70.5% correlation to the PMI. It sells similar items to Kellogg, both of which have betas of less than 0.6. 

Southern
Company (SO) has a negative 72.3% correlation to the PMI. The provider of electricity and gas has a beta of 0.51. 

Merck
& Co (MRK) has a negative 59.4% correlation to the PMI. The seller of medicines, dugs and vaccines sees almost no hit to sales in a rough economy. It has a 0.28 beta. 

There’s just one caveat to all of this. Four of the five stocks have already gained this year, while the S&P 500 is down in the midteens in percentage terms. But stocks can trade the same way for an extended period—and they’re likely to do so for a while until the market sees a bottom in earnings results for less-defensive companies. At some point, the defensive trade will reverse—and other stocks will benefit. 

For now, these stocks could provide shelter from the rest of the market—and they all pay dividends, too. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

Credit: marketwatch.com

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