(Source: Pixabay)
The year 2019 is coming to an end and when we are looking at the major indices, the performance during this year is quite impressive – and not just for the US indices. The year is not over yet and we never know what might happen, but the chances are high for the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), the Nasdaq-100 (QQQ), the EuroStoxx 50 and the Nikkei 225 (and of course many other indexes) to end the year with double-digit gains.
Data by YCharts
But we are also seeing clear cracks in the economic system and after the bull market has lasted for more than 10 years and valuation levels are being at extremes, we only have seen a few times during the past century, we should be very cautious.
The following article is split into two parts. First of all, we are looking at the state of the economy and what we could expect in 2020. In the second part of the article, we are looking at ten potential picks – considering the aspects we discussed in the first section of the article.
Macro Situation
When looking at the stock market right now – especially the US stock market, it seems like a never-ending party with the major indices rushing from all-time high to all-time high. And considering the technical picture and the news from last week, that a phase one deal might be signed in January (news situation from Wednesday, December 18, 2019 – it might have changed!), higher stock prices seem possible in the next few weeks and months.
(Source: Own work created with Metatrader 4)
But when we are not only looking at the potential development during the next few months (which is rather the result of traders), but rather focus on the time frames that are interesting for (long-term) investors, there are strong warning signs (and an escalating trade war is still not off the table and only the most prominent risk as it is kept in the news by a non-stop tweeting president).
The actions of the Fed, the inverted yield curve, the declining Purchasing Managers’ Index or the stagnating/declining earnings of companies listed in the S&P 500 are warning signs. As I published an article discussing these aspects in more details a few days ago (see: US Stock Market: Why It Is Detached From The Economy), I will not repeat the arguments once again.
When considering the possibility of an economic downturn and recession within the next one or two years in combination with a stock market decline (or crash), one possibility would be to stop investing at all. But to stop investing at all would mean we are trying to find the exact top, which is very difficult. To react to valuation levels (which are extremely high) however, is quite reasonable and investing not as much as 5 or 8 years ago is also reasonable.
When we are investing in stocks, we are therefore trying to pick stocks with limited downside risk. These are usually companies with a business, that is not cyclical and not really affected by economic downturns. We are also trying to search for stocks, that are trading at a rather low multiple as a low valuation also limits the risk of large stock declines during recessions. Additionally, we can also focus on companies paying a (high) dividend so we can collect at least the dividend while we are sitting through the downturn.
(Source: Stansberry Research)
In the following article, we will focus on companies from the healthcare segment (and pharmaceutical segment) as well as from the consumer staples segment. Both segments have performed quite well during past downturns. We will pick ten companies that could be a good investment in 2020 in case of a recession (these stocks will also decline in case of a recession, but maybe not as steep and might also recover faster).
Overview of Companies
In the following sections I will present ten different companies, which could be good picks during a recession. Five companies are from the consumer staples segment.
Data by YCharts
And five more companies are either healthcare or pharmaceutical companies.
Data by YCharts
Sysco (SYY)
We start by looking at several companies from the consumer staples industry – including restaurant chains, retailers and food distributors. The first company is Sysco Corporation, which markets and distributes a range of food and related products primarily to the foodservice industry as well as the food-away-from-home industry in the United States. It distributes frozen foods like meats, seafood, fully prepared entrees or fruits and vegetables as well as desserts. Additionally, it supplies various non-food items, including paper products like napkins, plates and cups. Today the company, which was founded in 1969, is operating 325 distribution facilities.
(Source: Sysco Investor Presentation)
Most of the products Sysco distributes have to be purchased even in economic downturns, making the business recession-proof to a rather high degree. This is also reflected in past results. Aside from a slight decline in 2009 (revenue decreased 1.8% YoY), Sysco could increase its revenue every single year at least since 1980. Net income fluctuated a little more, but during the last two recessions, net income only decreased 4.5% YoY in 2009 and could be increased in all the other years.
The average revenue growth over the last 20 years was 6.39% annually, which is a pretty solid growth rate. And while we should not expect extremely high growth rates from Sysco in the years to come, the company will perform with high levels of stability and consistency and growth in the low-to-mid-single-digits is realistic.
Darden Restaurants (DRI)
Another company dealing with food and beverages is Darden Restaurants, which owns and operates full-service restaurants in the United States and Canada. It is operating about 1,800 restaurants under different brands like Olive Garden, LongHorn Steakhouse, Yard House, The Capital Grille, Bahama Breeze and a few others. Additionally, the company has 70 restaurants operated by independent third parties through development and franchise agreements located in the United States, the Middle East and Latin America.
(Source: Darden Restaurants Investor Presentation)
One might expect, that people won’t go to restaurants as frequently or spend as much money during financial recessions, but obviously that is not the case. Eating and drinking are basic needs and when looking at past numbers, people continue to drink and eat at restaurants, making Darden Restaurants a recession-proof business. Darden Restaurants could increase its revenue every year during the 2001/2002 recession, but revenue decreased in 2007 (2.6% YoY decline) and 2010 (1.5% YoY decline). Net income could also be increased every single year during the last two recessions aside from 2009 (1.3% YoY decline).
When looking at the past 20 years, Darden Restaurants increased revenue with a solid pace and similar to Sysco we should not expect a high growth rate, but can count on low-to-mid-single-digit growth. Darden Restaurants will probably continue to grow its business with high stability and consistency.
General Mills (GIS)
A third company selling food and related products is General Mills. While Darden Restaurants is operating restaurants and Sysco is distributing food, General Mills is a leading global manufacturer of branded consumer foods, which is sold through retail stores in over 130 countries. About 2/3 of total revenue is generated in the United States with Europe and Australia contributing about $2 billion in annual sales and Asia and Latin America contributing about $1.7 billion. The company is mostly focused on super-premium ice cream, on convenience meals (like pizza, frozen breakfast and frozen entrees), on ready-to-eat cereal and snacks (including nutrition bars and frozen hot snacks). After the acquisition of Blue Buffalo, General Mills is also selling dog and cat food.
(Source: General Mills Annual Report)
When looking at the product mix above, we see pretty essential products people will have to purchase during a boom as well as during a bust. It is therefore not surprising that General Mills’ past results also show high consistency. During the last two recessions, revenue could be increased every single year aside from 2000 (17.3% YoY decline). And aside from 2002, in which net income declined 31% YoY, the bottom line could also be increased every single year during the last two recessions.
The performance of General Mills during the last 20 years is pretty similar as for Sysco and Darden Restaurants. On average, revenue grew 5.09% annually during the last 20 years and General Mills is also not operating in an industry with huge growth potential, but will perform with consistency and deliver low-to-mid-single-digit growth.
Starbucks (SBUX)
In contrast to the three companies mentioned before, Starbucks doesn’t need much introduction as most people should be familiar with the company. Starbucks operates as a roaster, marketer and retailer of specialty coffee worldwide and is basically selling different types of coffee, including seasonal and regional specialties. It also sells snacks including items such as chips and crackers and many stores also sell pre-packaged food items as well as hot and cold sandwiches. Selected Starbucks Evenings locations also offer beer, wine and appetizers. The company was founded in 1971 and is operating about 31,000 stores all over the world today.
Similar to the other companies mentioned above, Starbucks is selling food and especially beverages and people not only have to drink and eat during recessions, but obviously keep doing so at restaurants. While revenue decreased 5.9% in 2009 during the financial crisis and net income decreased 53% in 2008, Starbucks could report revenue as well as net income growth in every other year during the last two recessions.
Starbucks can still be called a growth company, but might be in the transition phase with growth rates slowing down. Nevertheless, during the last 20 years, average revenue growth was still 14.76% annually and we can expect Starbucks to grow in the mid-to-high-single-digits in the years to come (and earnings per share even growing in the double-digits). The company can continue its global expansion and will continue to open new stores. Additionally, it is still increasing the same-store sales at a healthy pace.
Target (TGT)
The fifth company belonging to the consumer staples segment is one of the major general merchandisers in the United States – Target. The company was founded in 1902 and is operating about 1,800 stores. Revenue is stemming from different product categories and is almost evenly distributed between beauty & household essentials, food & beverage, apparel & accessories, home furnishing & décor and hardlines.
(Source: Target Investor Relations)
As a big part of the company’s products are essential everyday items, the business can be described as pretty recession-proof and the demand for these products will also stay high during economic downturns. The past results also underline this statement. Revenue increased every single year during the last two recessions and net income only declined in 2009 during the financial crisis (29% YoY decline), but could increase in all the other years.
When looking at the revenue growth over the last 20 years, Target reported a solid average 4.61% growth number and we can be optimistic that the retailer will be able to grow with a similar pace in the years to come. Due to its strategy and the innovations in the past few years, we can expect Target to perform quite well. The stock had a good run in the recent past, but in my opinion the stock is a good investment nevertheless, and the valuation is still reasonable (certainly not a bargain any more).
Novo Nordisk (NVO)
After introducing five companies from the consumer staples segment, I will also present five companies from the pharmaceutical and healthcare segment. The first company is Novo Nordisk, a Danish pharmaceutical company, that is generating most of its revenue with pharmaceuticals for diabetes (especially insulin) and products for obese people. Aside from insulin, Novo Nordisk offers products like GLP-1, oral anti-diabetic products and products to fight obesity. About 20% of revenue stems from the biopharmaceutical segment, which offers products in the area of haemophilia, growth disorders and hormone replacement therapy.
(Source: Novo Nordisk Annual Report 2018)
Although Novo Nordisk is not from the consumer staples segment, the products it sells can also be described as essential products, which the patients have to purchase no matter what the economic situation is. Especially in case of insulin, patients really don’t have a choice – without insulin they would not be able to survive. The fact that Novo Nordisk is a recession-proof business is also underlined by past results. Revenue decreased a little bit in 2000 (about 0.5% YoY decline), but in all the other years during the last two recessions revenue increased annually. Net income could also increase every single year during the last two recessions.
Novo Nordisk has to keep the high level of innovation up and has to launch new products, but considering the past performance we can be pretty sure that Novo Nordisk will stay innovative. During the last 20 years, revenue grew 9.59% on average annually and growth in the mid-to-high single-digits definitely seems possible.
CVS Health (CVS)
CVS Health is a pharmacy retailer with about 10,000 stores and with CVS Caremark the company is also one of the big pharmacy benefit managers in the United States. In November 2018, CVS acquired Aetna, a healthcare insurance company, and this new reporting segment for CVS offers traditional, voluntary and consumer-directed health insurance products and related services. The pharmacy benefit management segment offers pharmacy benefit management solutions like plan design, administration or formulary management. And the pharmaceutical retail segment sells prescription drugs, over the counter drugs as well as beauty products, cosmetics and personal care products. Additionally, it provides health care services through its MinuteClinic walk-in medical clinics.
Almost all of CVS’ products and services are related to healthcare and pharmaceuticals and the demand for these products will stay pretty stable even during economic downturns. For most of the products and services, it is not like customers have a real choice – they have to buy despite the economic situation. And this stable performance can also be seen in the reported numbers of CVS Health. When looking at the performance during the last recessions, revenue could increase every single year during the 2001/2002 recession and aside from 2010 (revenue declined 2.3%), it could also increase every year during the financial crisis. Net income decreased pretty steep in 2001 (a decline of 45% YoY) and net income decreased moderately in 2010 (7.3% decline in 2010).
CVS also has great long-term growth potential and when looking at the last 20 years, revenue grew about 13.57% on average annually. And while CVS Health might not be able to grow revenue at similarly high rates in the years to come, management is confident that CVS will be able to report double-digit EPS growth from 2022 going forward.
Bayer AG (OTCPK:BAYZF)
Bayer is a German pharmaceutical and life science company, which was mostly in the headlines for the takeover of Monsanto and the following lawsuits. After the acquisition of Monsanto, the number of plaintiffs claiming they have been exposed to glyphosate-based products manufactured by Bayer’s subsidiary Monsanto increased to over 13,000. These plaintiffs are claiming that they have been exposed to Roundup and suffer personal injuries resulting from exposure to these products, including non-Hodgkin lymphoma (NHL) and multiple myeloma, and seek compensatory and punitive damages. But Bayer, which calls itself a life science company, is much more diversified and actually operating in four different business segments: the crop sciences segment, which includes Monsanto, the consumer health segment (selling nonprescription over-the-counter medicines, cosmetics and self-care solutions), the pharmaceuticals segment (selling products for cardiology as well as specialty therapeutics in the areas of oncology, hematology and ophthalmology) and the animal health segment, which will be acquired by Elanco (ELAN) and no longer be a part of Bayer.
(Source: Bayer Investor Presentation)
Bayer can also be called a recession-proof business as the pharmaceutical segment as well as the consumer health segment are selling essential products, which the customer need – independent from the state of the general economy. When looking at the numbers, we don’t see steep declines from revenue during the last two recessions, but revenue decreased in 2009 (5.3% YoY decline) and in 2002 as well as 2001 (2.2% YoY decline in both years). Net income was even more messy and in 2003, Bayer even had to report a negative bottom line. Nevertheless, I would call Bayer recession-proof.
It is also a little difficult in case of Bayer to look at the numbers and growth during the last two decades. In 2004, Bayer spun off Lanxess AG (OTCPK:LNXSF) and in 2015 Covestro (OTCPK:CVVTF) was spun off and as those two are also belonging to the biggest companies in Germany, we can assume that an average revenue growth of 1.74% for Bayer during the last two decades doesn’t mean much. We still can assume that Bayer will be able to grow in the low-to-mid-single-digits.
Johnson & Johnson (JNJ)
Johnson & Johnson is one of the major pharmaceutical and medical devices companies, which was founded in 1887 and operates in three segments. The consumer segment offers baby care products, oral care products or beauty products as well as over-the-counter medicines (including allergy products or products for flue). The pharmaceutical segment offers products in various therapeutic areas including immunology, infectious diseases, neurosciences, oncology, pulmonary hypertension and cardiovascular and metabolic diseases. The medical devices segment offers orthopedic products, products for general surgery or sterilization and disinfection products to reduce surgical infections as well as diabetes care products.
(Source: JNJ Factsheet)
These are all products, customers need all the time and similar to the other healthcare companies mentioned in this article, Johnson & Johnson can also be described as pretty recession-proof. Baby care products, medical devices or pharmaceuticals are products with a stable demand, which are purchased all the time. When looking at the past results, we see revenue declining a little in 2009 (2.9% YoY) and in 2010 (0.5% YoY), but in the 2001/2002 recession, Johnson & Johnson could increase its revenue every single year. Aside from revenue, JNJ could also increase net income annually during the 2001/2002 recession. During the financial crisis, net income declined a little in 2007 (4.3% YoY decline) and in 2009 (5.3% YoY decline).
When looking at revenue growth during the past 20 years, we see a pretty solid growth of 6.38% annually and we can be confident, that Johnson & Johnson will be able to grow with a similar pace in the future.
Abbott Laboratories (ABT)
Abbott Laboratories develops, manufactures and sells healthcare products worldwide and was founded in 1888. The nutritional products segment provides pediatric and adult nutritional products. The diagnostic products segment offers laboratory systems in the areas of immunoassay, clinical chemistry, hematology, and transfusion, molecular diagnostics systems. The company also provides glucose and blood glucose monitoring systems, including test strips, sensors, data management decision software and accessories for people with diabetes.
(Source: Abbott Laboratories Annual Report)
Like the other healthcare companies mentioned in this article, the demand for pharmaceuticals and medical devices will stay at similar levels during a recession as in most other times of the economic cycle and this consistency is also reflected by past results. During the financial crisis as well as during the 2001/2002 recession, Abbott Laboratories could increase its revenue every single year. Net income however decreased in 2001 (44.4% YoY decline), in 2003 (1.4% YoY decline) and in 2010 (19.5% YoY decline).
Over the past 20 years, Abbott Laboratories could increase its revenue 4.58% on average every single year and we have to consider the spin-off of AbbVie (ABBV) in 2013, which decreased revenue almost by half that year. Over the long run, we can assume revenue growth at least in the mid-single-digits for Abbott Laboratories.
Conclusion
We don’t know what might happen in 2020 and it is possible that the stock market will continue to climb higher. But considering the strong warning signs, it makes sense to position adequately. Stocks from the healthcare segment as well as the consumer staples segment are good picks for economic downturns as they usually won’t see fundamentals decline as steep as other companies. And in case the economy should continue its upward path, these ten stocks are still great investments and mostly companies with an economic moat around its business.
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