10 Stocks to Buy Before the Next Recession

Published on March 17, 2022 at 8:57 am by Hamna Asim in Hedge Funds, News

In this article, we discuss 10 stocks to buy before the next recession. If you want to skip our detailed analysis of the stock market outlook, go directly to 5 Stocks to Buy Before the Next Recession.

A recession is indicative of declining economic output and growth, lower consumption and demand, reduced investment in the economy, a stock market crash, and rising unemployment. A recessionary environment is often stimulated by a market bubble bursting, financial crisis, natural disasters, or a trade shock.

The Current Market Landscape

Before Russia declared war on Ukraine, the economic outlook for 2022 was stretched thin but analysts were still hopeful, despite the headwinds from inflation, rate hikes, and pandemic-driven challenges. The economic environment has become highly unpredictable and has been spiraling out of control since February 24, when Russia invaded Ukraine, and the ensuing sanctions from the West hit a lot of businesses with major links to Russia in terms of vendors, customer base, and supply chain.

The economic conditions were on the verge of normalizing in 2022 when the war broke out, and the risk of recession peaked. With oil crossing $130 per barrel and energy crisis at a record high, consumer confidence has taken a hit, which will lead to lower spending across the global economy. In addition to that, broken supply chains as a result of war and sanctions will majorly impact the output.

35% Probability of Recession in the United States

The Fed has been delaying rate hikes, which many market specialists agree should have been implemented at the end of 2021. If the Fed continues to fight inflation with rate hikes, the market might risk a mild recession, but inflation will be controlled.

With inflation at a 40-year high and analysts predicting stagflation amid the war, Goldman Sachs on March 10 lowered its outlook for US economic growth, slashing its 2022 full-year real GDP growth projections by 25 basis points to 1.75%.

Jan Hatzius, Goldman Sachs’ chief economist, discussed the growth outlook for the United States in 2022, stating:

“And we now see the risk that the U.S. enters a recession during the next year as broadly in line with the 20% to 35% odds currently implied by models based on the slope of the yield curve.”

CNBC senior economics reporter, Steve Liesman, stated on March 15 that a recent survey shows that respondents believe the chances of a US recession in 2022 are up 10 points from the last survey. The respondents do not have much confidence in the Fed and its ability to control prices with rate hikes, according to Liesman, since the market is too dynamic and the Fed’s track record at tackling these situations is not ideal. Similarly, he pointed out that the probability of a European recession according to the survey was 50%.

“The longer the war persists, the greater the probability of a recession”

Rob Sechan of NewEdge Capital Group joined the ‘Halftime Report’ on March 10 to discuss his outlook on the stock market and the impact of the Russian war on the US economy. As a money manager, Sechan said that his firm was constantly monitoring recession to protect the investments for their clients, and the longer the war persists, the probability of a recession goes up. The market could go down to 3200 on the S&P if there is a recession, which is obviously “really ugly”, according to Sechan.

Alicia Levine of BNY Mellon Wealth Management believes that although 2022 will not be a year for recession, the market will experience further downside in the near-term, before picking up pace in the later half of the year. She stated on March 8 that war has caused so much uncertainty that the market is pricing in a greater risk of recession into the securities. If the S&P 500 does not hold and falls below 4100, there is risk of further downside, according to Levine.

On March 14, CNN Business quoted Jim Reid, a strategist with Deutsche Bank, who said:

“The risks of a recession are building but not necessarily immediate unless the global geopolitics dramatically deteriorate from this delicate starting point.”

Similarly, US Labor Secretary Marty Walsh views recession as “a real likelihood” but he also noted that “we have a very strong economy” and the US job market has rebounded after the pandemic-driven job unemployment.

Amid several concerns on upcoming recession and varying stock market predictions, a few safe stocks to load up on include Walmart Inc. (NYSE:WMT), Abbott Laboratories (NYSE:ABT), and Berkshire Hathaway Inc. (NYSE:BRK-B), among others discussed at length below.

Luis Louro / shutterstock.com

Our Methodology

After a detailed analysis of the current market, we selected securities that belong to sectors which are often considered to be “recession-proof”, such as mining and metals, consumer staples, defense, and healthcare. These stocks have solid business fundamentals, strong balance sheets, and positive analyst ratings.

Data from 924 elite hedge funds tracked by Insider Monkey during the fourth quarter of 2021 was used to identify the number of hedge funds that hold stakes in each firm.

Stocks to Buy Before the Next Recession

10. Alcoa Corporation (NYSE:AA)

Number of Hedge Fund Holders: 41

Headquartered in Pittsburgh, Pennsylvania, Alcoa Corporation (NYSE:AA) is an industrial company involved in the production of alumina, aluminum, and bauxite. The company supplies its products to several major sectors including technology, mining, refining, smelting, fabricating, and recycling.

As the West implements sanctions on Russia, a leading global supplier of aluminum, supply chains will tighten worldwide. The energy crisis in Europe also led to aluminum production weakening and output declining severely. This will result in demand for Alcoa Corporation (NYSE:AA) increasing significantly.

On March 9, Jefferies analyst Christopher LaFemina raised the price target on Alcoa Corporation (NYSE:AA) to $98 from $90 and kept a Buy rating on the shares. The analyst has elevated his price objectives for the metals and mining group to factor in his growing conviction in the bull market for mining over the next several years, arguing that higher geopolitical risk will delay a supply response to raised prices. A “re-rating is coming” and mining should outperform for the next five-plus years, the analyst told investors in a bullish thesis.

For the fourth quarter of 2021, Alcoa Corporation (NYSE:AA) reported above consensus earnings and revenue on January 19. The company’s adjusted EBITDA excluding special items was 23% higher, reaching $896 million, mainly owing to increased aluminum and alumina prices. The company’s fortress balance sheet and the reliance of multiple sectors on aluminum is likely to support operations during a recession.

Among the hedge funds tracked by Insider Monkey in Q4 2021, 41 hedge funds were bullish on Alcoa Corporation (NYSE:AA), compared to 44 funds in the prior quarter. Fisher Asset Management is the biggest shareholder of the company, with 6.35 million shares worth $378.5 million.

In addition to Walmart Inc. (NYSE:WMT), Abbott Laboratories (NYSE:ABT), and Berkshire Hathaway Inc. (NYSE:BRK-B), smart investors are piling into Alcoa Corporation (NYSE:AA) amid rising concerns about an upcoming recession.

9. Lockheed Martin Corporation (NYSE:LMT)

Number of Hedge Fund Holders: 42

Lockheed Martin Corporation (NYSE:LMT) is an American defense and aerospace company operating via four main segments, namely Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space. The stock rose 26.70% year-to-date, as defense companies gained institutional interest amid the Russian war on Ukraine and ensuing geopolitical tensions.

Despite a recessionary environment, the US Department of Defense continues to fund defense contractors like Lockheed Martin Corporation (NYSE:LMT), which keeps their income stable even as the broader market faces consequences of reduced consumer spending.

On February 28, Wolfe Research analyst Michael Maugeri upgraded Lockheed Martin Corporation (NYSE:LMT) to Outperform from Peer Perform with a $467 price target. The analyst upgraded the defense sector to Market Overweight after Russia’s invasion of Ukraine. He expects stronger international military spending and a better budget set by the Department of Defense for defense contractors, and projects that defense stocks will provide attractive value given his outlook for a multi-year increase in global military spending. He justified his Lockheed Martin Corporation (NYSE:LMT) upgrade given its large scale international exposure relative to its competitors and continuously strong demand in aeronautics.

A total of 42 hedge funds were bullish on Lockheed Martin Corporation (NYSE:LMT) at the end of December 2021, compared to 51 funds in the preceding quarter. D E Shaw is a significant shareholder of the company, with 482,130 shares worth $171.35 million.

Here is what Vltava Fund has to say about Lockheed Martin Corporation (NYSE:LMT) in its Q4 2021 investor letter:

“Of course, not all of our companies are doing better than we expected. Lockheed Martin fell somewhat short of our expectations last year. In the cases of Lockheed disruptions in the supply and logistics chains. Lockheed uses a great many subcontractors from various countries and could not avoid issues with continuity of supplies. As a result, production will be slightly lower than we had expected.”

8. Dollar Tree, Inc. (NASDAQ:DLTR)

Number of Hedge Fund Holders: 44

Dollar Tree, Inc. (NASDAQ:DLTR) is headquartered in Chesapeake, Virginia, operating as a network of discount variety stores across the United States and Canada. Dollar Tree, Inc. (NASDAQ:DLTR) is positioned to benefit from the possible recession, as more customers will shift from branded names to discounted versions of products. The stock has gained close to 70% over the last six months, and the company posted above consensus earnings for the fourth quarter of 2021.

Piper Sandler analyst Peter Keith upgraded Dollar Tree, Inc. (NASDAQ:DLTR) on March 8 to Overweight from Neutral with a price target of $181, up from $157. The change in Dollar Tree, Inc. (NASDAQ:DLTR)’s senior management has set the course for a multi-year improvement story that will accelerate earnings in the coming years, the analyst told investors in a research note. He remains “particularly bullish” on Family Dollar’s potential for improvement and has increasing confidence in Dollar Tree, Inc. (NASDAQ:DLTR)’s pricing strategy and its multi-price point products.

According to the fourth quarter database of Insider Monkey, 44 hedge funds were bullish on Dollar Tree, Inc. (NASDAQ:DLTR), up from 38 funds in the quarter earlier. Adage Capital Management, a prominent shareholder of the company, loaded up on the stock in Q4 2021, increasing its stake by 720% to more than 2 million shares worth $248.45 million.

Here is what Broyhill Asset Management has to say about Dollar Tree, Inc. (NASDAQ:DLTR) in its Q4 2021 investor letter:

“Our short-term trade in Avis was unusual for our long-term investment approach, but occasionally the market figures out mispricing sooner than later, and when it does, we are more than happy to take our chips off the table and wait for the next opportunity.

Our investment in Dollar Tree, which we’ve held for nearly five years, is more representative of our typical time horizon and investment philosophy, which seeks mispriced assets with minimal downside and the potential to double our capital over 3-5 years. Those doubles rarely play out as quickly as the surge in rental car pricing. Just last quarter, we highlighted Dollar Tree as a top detractor after the company issued weak guidance due to rising cost pressure. Investors were rightly frustrated after years of management missteps and false starts following the acquisition of Family Dollar.

At some point, we hoped, sentiment would be just right. While the timing of that scenario is impossible to predict, we increased our position in September as shares traded back towards our original 2017 purchase price. At month end, the board increased Dollar Tree’s existing share repurchase authorization to $2.5 billion, representing~ 13% of the company’s then market capitalization, initiating a dramatic shift in investor sentiment. Management also announced that it was on track to have 500 Dollar Tree Plus stores by fiscal year-end, with another 1,500 stores planned for FY22 and at least 5,000 expected by FY24. In addition, management highlighted the success of the company’s Combo Stores (which include both Dollar Tree and Family Dollar banners), noting sales and gross profit increases greater than 20% and 30%, respectively. While there are only 105 existing Combo Stores, management expects to add 400 more in FY22, with the potential for up to 3,000 over the next several years.

In our experience, big gains often come after years of meager performance. Patience truly is a virtue in this business, as successful investing requires confidence in your research and analysis, even when the market disagrees with you for what may seem like an eternity. In this case, after holding Dollar Tree for half a decade, shares nearly doubled, gaining 77% in the two months following that management announcement. Despite recent gains, we continue to hold our investment as consensus estimates have yet to catch up to the likely inflection in earnings power from higher price points. And with the guidance of Richard Dreiling, the former Dollar General CEO, credited with turning around DG in the early part of the last decade, we think the odds of successful execution have increased materially.”

7. The Mosaic Company (NYSE:MOS)

Number of Hedge Fund Holders: 46

The Mosaic Company (NYSE:MOS) is a Florida-based agriculture and fertilizer company that mines and extracts potash, urea, and phosphate. Fertilizer prices are continuously rising as the sanctions on Russia leave the global economy with a massive supply gap in terms of cheap fertilizers, giving way to concerns about food inflation accelerating worldwide if nourishing crops becomes expensive.

The Mosaic Company (NYSE:MOS) will likely perform well during a recession since the fertilizers will remain in demand despite unemployment rising.

On March 7, Piper Sandler analyst Charles Neivert raised the price target on The Mosaic Company (NYSE:MOS) to $80 from $57 and kept an Overweight rating on the shares. According to the analyst, agriculture stocks may be in the strongest position since 2007, and he expects an “extended period of constructive grain pricing” given the inability of the global suppliers to increase grain output despite maximized production. The analyst significantly increased his 2022 and 2023 EBITDA estimates for chemicals companies since they stand to benefit from the Russia-Ukraine war, and the outperformance will last for many years after the conflict resolution.

A total of 46 hedge funds were bullish on The Mosaic Company (NYSE:MOS) at the end of December 2021, up from 40 funds in the earlier quarter. Soroban Capital Partners is a leading shareholder of the company, owning 4.3 million shares worth $172.70 million.

Here is what Ariel Focus Fund has to say about The Mosaic Company (NYSE:MOS) in its Q3 2021 investor letter:

“Our third quarter contributors generally fit this “happy family” description. Mosaic Company is the largest contributor to performance this year as well as our biggest holding as we go to print. The company returned +12.20% in the quarter and +56.16% so far this year. We have long believed Mosaic is well positioned to help the world feed its 7 billion people with a better diet amid finite agricultural resources. The company’s nutrients, particularly phosphates and potash, are key to improving yields on the limited number of global acres devoted to farming. Mosaic believes up to 60% of the yield on many crops is determined by the appropriate application of nutrients. For this reason, the company has remained focused on expanding its leadership position in this core fertilizer business. For several years, this concentrated effort did not show results. But in 2021, Mosaic’s focus began to pay off. Strong U.S. crop prices as well as growing transportation costs for imported fertilizer from overseas mines have led to improved earnings expectations. Last December, analysts showed a mean estimate for Mosaic 2021 EPS of $1.43. Today, those same analysts expect the company to earn $4.67! Estimates for 2022 EPS have also increased dramatically from $2.10 as of December 2020 to $4.99 today. We believe Mosaic will also continue to benefit from global inflation.”

6. Target Corporation (NYSE:TGT)

Number of Hedge Fund Holders: 49

Target Corporation (NYSE:TGT) is a significant American retailer that operates as a nationwide chain of big-box department stores. The retail formats at Target Corporation (NYSE:TGT) include discount stores and hypermarkets. On March 1, the company reported earnings per share of $3.19 for the December quarter, above market predictions by $0.35.

Companies like Target Corporation (NYSE:TGT), with mammoth balance sheets — as evidenced by 50 consecutive years of dividend increases — are positioned to survive economic recessions. In addition to that, the discount retail format will ensure that revenue is not lost, since customers will shift to cheaper alternatives but cannot cut down on day-to-day necessities. The stock has gained 19.50% over the last 12 months.

On March 10, Target Corporation (NYSE:TGT) declared a $0.90 per share quarterly dividend. The dividend will be distributed on June 10, to shareholders of record on May 18.

Raymond James analyst Bobby Griffin lowered the price target on Target Corporation (NYSE:TGT) to $275 from $290 on March 2, and kept a Strong Buy rating on the shares. The slashed price objective conveys the compressed valuation multiples for the sector amid concerns over inflation and other macro-driven fears, the analyst told investors. However, Target Corporation (NYSE:TGT) remains a long-term winner in the current retail space and the analyst believes that it can sustain its ongoing market share gains across multiple product lines.

The fourth quarter database of Insider Monkey suggests that 49 hedge funds were bullish on Target Corporation (NYSE:TGT), with collective stakes of approximately $4 billion. Rajiv Jain’s GQG Partners is the largest shareholder of the company, with 4.90 million shares worth $1.13 billion.

Target Corporation (NYSE:TGT) is a strong candidate when it comes to building a recession-proof investment portfolio, just like Walmart Inc. (NYSE:WMT), Abbott Laboratories (NYSE:ABT), and Berkshire Hathaway Inc. (NYSE:BRK-B).

Here is what Nelson Capital Management has to say about Target Corporation (NYSE:TGT) in its Q2 2021 investor letter:

“We added Target (tkr: TGT) to our consumer staples sector. Target Corporation (NYSE:TGT) offers a broad array of products in owned and known brand items at affordable prices. Its omni-channel fulfillment centers allow customers to receive their items via in-store pickup, curbside pickup, same-day shipping and regular shipping while simultaneously reducing operating costs. With a significantly lower valuation than peers and a unique operating strategy, Target is an attractive holding.”

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