‘More Pain Likely Ahead’: 10 Stocks to Brace Yourself for Recession

Published on June 8, 2022 at 10:40 am by Hamna Asim in Hedge Funds, News

In this article, we discuss 10 stocks to brace yourself for recession. If you want to see more stocks in this selection, check out ‘More Pain Likely Ahead’: 5 Stocks to Brace Yourself for Recession.

Merrill, an American investment and wealth management division of Bank of America, disclosed its capital market report on May 31, 2022, where the firm shared its outlook on the current bear market, a shift in traditional investment strategies, and the situation of supply and demand in China, the global trade giant.

Major Structural Shifts May Be Underway

Global economic growth and profitability prospects are battered given the soaring interest rates, rampant inflation, the Russia Ukraine war, and the Chinese lockdowns due to the ongoing waves of the pandemic. The Federal Reserve’s tightening monetary policies have also wiped out liquidities for multiple US companies. According to Merrill, investors cannot realistically choose the strategies that bode well for them during earlier market meltdowns, because the current market shows signs of multiple structural shifts. The large-cap growth stocks have heavily slumped, and the market has favored value plays.

‘More Pain Likely Ahead’

The Fed provided massive liquidity relief during 2020 and 2021, but the artificially boosted economy created multiple bubbles that are now popping, especially overvalued innovative startups and cryptocurrencies. The drop in liquidity will also result in deteriorating credit conditions, bank lending will tighten, and a softer economic environment will emerge. The record-high fuel and gas costs will further shrink corporate balance sheets, and asset prices will continue to decline, signaling more pain likely ahead as demand normalizes but supply growth is notably slower.

The broad selloff in equities has propelled the S&P 500 Index nearly into bear territory, and the US benchmark is about 20% below its January high. Merrill believes that the traditional 60/40 portfolio consisting of equities and fixed income needs to shift, despite the strategy providing positive annual returns 81% of the time, averaging 13.8%. However, this 60/40 portfolio has come under scrutiny lately, as there is a greater positive correlation between bonds and equities. With a sharp selloff in equities and higher bond yields, the 60/40 construct has offered lower returns.

While Merrill thinks that portfolios need to be redesigned, the traditional investment approach should not be entirely neglected. Investors should choose alternative investments, picking real assets like commodities and real estate. These assets could offer stable returns even in a high inflationary backdrop and slowing economic growth. The firm advises investors to keep a long-term horizon and diversify their portfolios. Recession tends to loosen the monetary policies, which supports bond prices and helps the weaker equities. Firms also benefit from cheaper borrowing and less competition, and expand their businesses, which eventually leads to higher profitability and growth.

Luis Louro / shutterstock.com

An Outlook on Chinese Consumer Spending

The pandemic-driven lockdowns in China are not only impacting multinationals with supply ties to the country but also the Chinese domestic consumers. China accounts for 12% of the global household and personal consumption, and in Q1 2022, trade restrictions in and out of China led to lower sales for big names like Adidas, Starbucks, Estee Lauder, Apple, and BMW. Chinese retail sales dropped 11.1% in April and 3.5% in March year over year. However, China remains a hub of profitability, both from demand and supply-side, and after a softer Q2, Merrill predicts a solid second half of the year for US multinationals with exposure to China.

Merrill is bullish on US large-cap value stocks, as well as small-cap growth and value plays in this market. The preferred sectors to weather the upcoming recession are energy, financials, real estate, materials, and healthcare. Some of the most notable stocks to potentially solidify an equity portfolio against recession include Morgan Stanley (NYSE:MS), Exxon Mobil Corporation (NYSE:XOM), and McKesson Corporation (NYSE:MCK).

Our Methodology

We assessed the sectors that Merrill was bullish on as of May end, selecting the stocks that received optimistic analyst ratings recently, display strong business fundamentals, and are established companies that have weathered market storms previously and survived the volatility.

We have also mentioned the hedge fund sentiment around the holdings, which was analyzed from Insider Monkey’s database of 900+ elite hedge funds as of the end of the first quarter of 2022. Since elite funds spend substantial resources to design lucrative stock picking strategies, Insider Monkey believes that tracking their holdings is a wise idea.

10. Exxon Mobil Corporation (NYSE:XOM)

Number of Hedge Fund Holders: 83

Exxon Mobil Corporation (NYSE:XOM) is an American crude oil and natural gas company, operating through Upstream, Downstream, and Chemical segments. The company was founded in 1870 and is headquartered in Irving, Texas. Exxon Mobil Corporation (NYSE:XOM) reported its Q1 results on April 29, posting a revenue of $90.50 billion, outperforming estimates by $5.62 billion.

Exxon Mobil Corporation (NYSE:XOM) is also a notable dividend player. The company has consistently raised its dividend payout for 39 years. Exxon Mobil Corporation (NYSE:XOM) declared on April 27 a $0.88 per share quarterly dividend, in line with previous. The dividend is payable on June 10, to shareholders of record on May 13. The stock delivers a dividend yield of 3.41% as of June 7.

On June 7, Evercore ISI analyst Stephen Richardson upgraded Exxon Mobil Corporation (NYSE:XOM) to Outperform from In Line, raising the price target to $120 from $88. As per the analyst, the present valuation is at a higher than 20% discount to historical levels and he sees returns increasing for the industry as a whole and for Exxon Mobil Corporation (NYSE:XOM) specifically. He forecasts long-term earnings growth, generated by upstream upgrading and cost cuts. The analyst expects Exxon Mobil Corporation (NYSE:XOM) to deliver a sector-leading ROCE target of 15% by 2025 and 17% by 2027, observing that the path to doubling earnings is possibly “achievable”.

According to Insider Monkey’s Q1 data, 83 hedge funds were bullish on Exxon Mobil Corporation (NYSE:XOM), up from 71 funds in the earlier quarter. Rajiv Jain’s GQG Partners is the leading stakeholder of the company, with 51.80 million shares worth about $4.3 billion.

Here is what Goehring & Rozencwajg Associates has to say about Exxon Mobil Corporation (NYSE:XOM) in its Q3 2021 investor letter:

“After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.

What should Chevron expect?

It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam gas project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publicly expressed concerns about both projects.

According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.”

9. American Tower Corporation (NYSE:AMT)

Number of Hedge Fund Holders: 50

American Tower Corporation (NYSE:AMT) is one of the largest real estate investment trusts, operating and developing multi-tenant communications infrastructure and properties worldwide. On April 27, American Tower Corporation (NYSE:AMT) reported its Q1 results, announcing earnings per share of $1.56 and a revenue of $2.66 billion, above market consensus estimates by $0.44 and $47.52 million, respectively.

On June 3, American Tower Corporation (NYSE:AMT) priced its registered public offering of 8.35 million common shares for $256.00 per share, resulting in expected net proceeds of approximately $2,083.5 million. The net proceeds will be used to repay existing debts.

American Tower Corporation (NYSE:AMT) on May 19 declared a quarterly dividend of $1.43 per share, a 2.1% increase from its prior dividend of $1.40. The dividend is payable on July 8, to shareholders of record on June 17. The company delivers a dividend yield of 2.15% as of June 7.

BofA analyst David Barden on June 5 resumed coverage of American Tower Corporation (NYSE:AMT) with a Buy rating and a $315 price target. The analyst noted that American Tower Corporation (NYSE:AMT) reported the conclusion of its equity offering to help fund last year’s CoreSite acquisition. American Tower Corporation (NYSE:AMT) also announced that it has initiated a non-binding term sheet for a third-party minority investment in its data center business for about $2.5 billion. Overall, the analyst believes the private capital announcement clears an overhang for some investors and projects the shares to move positively in the coming days.

Among the hedge funds tracked by Insider Monkey, 50 funds reported owning stakes in American Tower Corporation (NYSE:AMT) at the end of March 2022, collectively worth $4.10 billion. Charles Akre’s Akre Capital Management is the biggest shareholder of the company, with roughly 7 million shares worth $1.75 billion.

In addition to Morgan Stanley (NYSE:MS), Exxon Mobil Corporation (NYSE:XOM), and McKesson Corporation (NYSE:MCK), elite hedge funds are piling into American Tower Corporation (NYSE:AMT) to brace against recession.

In its Q3 2021 investor letter, Qualivian Investment Partners, an asset management firm, highlighted a few stocks and American Tower Corporation (NYSE:AMT) was one of them. Here is what the fund said:

“What Attracts Us

Superior Business:

High barriers to entry resulting from low bargaining power of suppliers (land owners) and customers (wireless companies). Neither can find reasonable substitutes for existing cell towers. Combined with low possibility of disruption, this results in a business oligopoly and pricing power.

Stable business with consistent high returns on equity, low maintenance capital required, and strong cash generation.

− Ten-year, non-cancelable contracts with built in pricing escalators and high renewal rates

− 1%-2% churn

Superior Reinvestment Opportunities:

Strong growth for the foreseeable future due to increasing demand for wireless data usage, resulting in wireless carriers Capex equipment spend on existing and new towers.

Low maintenance capital expenditure requirements; most of capital expenditure is for growth

Superior Management / Capital Allocation:

Capital reinvested back in business has had returns well above cost of capital
Company has purchased stock opportunistically…” (Click here to see the full text)

8. Air Products and Chemicals, Inc. (NYSE:APD)

Number of Hedge Fund Holders: 39

Air Products and Chemicals, Inc. (NYSE:APD) is an American provider of atmospheric gasses, process and specialty gasses, and handling equipment worldwide. On May 5, Air Products and Chemicals, Inc. (NYSE:APD) reported Q1 earnings per share of $2.38, beating market consensus by $0.01.

2022 marks the 40th consecutive year of dividend increases at Air Products and Chemicals, Inc. (NYSE:APD) and the company expects to return more than $1.4 billion to its shareholders in 2022. On May 19, Air Products and Chemicals, Inc. (NYSE:APD) announced a quarterly per share dividend of $1.62 per share, payable on August 8 to shareholders of the company on July 1. The company offers a dividend yield of 2.48% as of June 7.

On May 27, JPMorgan analyst Jeffrey Zekauskas told investors that he sees “good reason to take a second look at Air Products”. According to the analyst, the company has been successful in boosting earnings amid a recessionary backdrop and has a “strong earnings dynamic” for 2022. He thinks Air Products and Chemicals, Inc. (NYSE:APD) is capable of managing raw material inflation “generally well” and reiterated an Overweight rating on the stock with a $275 price target.

According to Insider Monkey’s database, Air Products and Chemicals, Inc. (NYSE:APD) was part of 39 public hedge fund portfolios at the end of Q1 2022, compared to 40 funds in the earlier quarter. Jim Simons’ Renaissance Technologies is the largest position holder in the company, with 680,700 shares worth over $170 million.

Here is what ClearBridge Investments Large Cap Value Strategy has to say about Air Products and Chemicals, Inc. (NYSE:APD) in its Q1 2022 investor letter:

“While commodities-exposed areas of the materials sector such as mining and steel fared well in the quarter, we tend to have less direct exposure to commodities across our portfolio. Holdings like industrial gas company Air Products and Chemicals (NYSE:APD) faced sharp input cost escalation, driving meaningful margin compression, which was not well-received by investors. While negative in the short term, we remain confident that the company will be able to adjust pricing accordingly and recover margins over the medium term.”

7. Bank of America Corporation (NYSE:BAC)

Number of Hedge Fund Holders: 99

Bank of America Corporation (NYSE:BAC) provides financial products and services to customers worldwide, operating through Consumer Banking, Global Wealth & Investment Management, Global Banking, and Global Markets segments. Bank of America Corporation (NYSE:BAC) reported its Q1 results on April 18, posting an EPS of $0.80 and a revenue of $23.23 billion, above Street consensus by $0.06 and $135.77 million, respectively.

The company has paid quarterly dividends since 2005. On April 27, Bank of America Corporation (NYSE:BAC) declared a $0.21 per share dividend, in line with previous. It is distributable on June 24, to shareholders of the company as of the close of business on June 3. Bank of America Corporation (NYSE:BAC)’s dividend yield on June 7 came in at 2.31%.

On May 3, Oppenheimer analyst Chris Kotowski reiterated an Outperform rating on Bank of America Corporation (NYSE:BAC) but slashed the price target on the stock to $50 from $52. The analyst observed that loan growth and higher interest rates are positive catalysts for the banks, which are positioned to navigate a recession economy successfully, remaining “solidly profitable with their dividends intact”. He believes investors should take advantage of the recent share weakness.

Among the hedge funds tracked by Insider Monkey in Q1 2022, 99 funds were long Bank of America Corporation (NYSE:BAC), up from 84 funds in the earlier quarter. Warren Buffett’s Berkshire Hathaway is the leading position holder in the company, with over 1 billion shares worth $41.6 billion.

Here is what ClearBridge Investments has to say about Bank of America Corporation (NYSE:BAC) in its Q1 2021 investor letter:

“Higher long-term interest rates supported financials such as Bank of America, which has shown both defensive and offensive characteristics in the past year. We believe it continues to be the least risky large bank from a credit standpoint, with conservative underwriting and controlled risk taking, a leading consumer deposit franchise, scale and technology. It is also a leader in its commitments to sustainability, or as it terms it, responsible growth. Disclosure and reporting at all levels form a large part of this commitment, including gender diversity and equality, environmental commitments and support of communities in which it operates. In the first quarter Bank of America announced it is setting a goal of net-zero greenhouse gas (GHG) emissions in its supply chain and operations, and notably also in its financing activities, before 2050.”

6. American Express Company (NYSE:AXP)

Number of Hedge Fund Holders: 69

American Express Company (NYSE:AXP) is a New York-based provider of charge and credit payment card products, as well as travel-related services worldwide. American Express Company (NYSE:AXP) declared on May 4 a $0.52 per share quarterly dividend, in line with previous. The dividend is payable on August 10, for shareholders of record on July 1.

On April 22, American Express Company (NYSE:AXP) reported its first quarter results, announcing earnings per share of $2.73, beating estimates by $0.26. The revenue of $11.74 billion also outperformed market forecasts by $76 million, reflecting a year over year growth of about 29.5%.

Edward Jones analyst Kyle Sanders on June 6 upgraded American Express Company (NYSE:AXP) to Buy from Hold. The analyst said that the company’s “loyal base” of affluent customers will be less impacted by inflation, making American Express Company (NYSE:AXP) better positioned to sustain strong spending patterns compared to its credit card peers. Moreover, American Express Company (NYSE:AXP)’s latest plans to gain a younger clientele and solidify its product portfolio have resulted in “robust” new account growth, the analyst told investors in a bullish thesis.

According to Insider Monkey’s records, American Express Company (NYSE:AXP) was part of 69 public hedge fund portfolios at the conclusion of the first quarter of 2022, compared to 64 funds in the preceding quarter. Ken Fisher’s Fisher Asset Management is one of the leading American Express Company (NYSE:AXP) stakeholders, with 15.6 million shares worth $2.9 billion.

Like Morgan Stanley (NYSE:MS), Exxon Mobil Corporation (NYSE:XOM), and McKesson Corporation (NYSE:MCK), American Express Company (NYSE:AXP) is one of the recession stocks on the radar of elite investors.

Here is what ClearBridge Investments has to say about American Express Company (NYSE:AXP) in its Q2 2021 investor letter:

“In financials, American Express has done an excellent job demonstrating the resiliency of its franchise in the midst of a global pandemic that drove a 60% decline in its core travel and entertainment business. The company’s spend-centric model has been helped by fiscal stimulus ensuring a flush consumer, while management continues to execute well by adding millions of new consumer and small and medium business accounts, which should benefit the franchise over the medium to long term. We remain optimistic regarding the company’s prospects as travel and entertainment activity rebounds, adding to our position in the quarter.”

Click to continue reading and see ‘More Pain Likely Ahead’: 5 Stocks to Brace Yourself for Recession.