Stocks to Buy During a Recession
As I write this in March 2020, the Dow Jones Industrial Average is down around 30% from its recent high. The world is currently drowning in news related to COVID-19 — from health and politics, to how it will impact our lifestyle in the foreseeable future. The stock market has been extremely volatile as it becomes more and more clear that this global pandemic will have a significant negative effect on U.S. economic activity for a number of quarters.
Everyone is doing their best to cope and battle this pandemic. The U.S. Federal Reserve is doing what it can to help stimulate the economy by lowering interest rates as the headlines alarmingly show the number of positive COVID-19 cases in the U.S. continue to rise.
My family and I are staying alert and taking extra precautions during this time. My spouse and I are lucky to be able to work from home and not have to worry about childcare. We try to create a somewhat “normal” environment for the kids. We are so thankful for all the essential workers out there, endangering their lives while saving the lives of others, or contributing in their own way to create a somewhat functioning society for the rest of us.
Financially, no one will leave unscathed from this pandemic. No matter how grim, life must go on and we must do the best we can to protect our family and plan for the future. The worst thing to do during a stock market crash is to panic. As long term investors, we should examine the possibility of adding sensibly to our stock portfolio. Everything is always more clear in hindsight, but there are some things to keep in mind to ensure you’re making sound judgements.
How to Screen for Stock Ideas
Given the current situation and the possibility of a vaccine for COVID-19 being 12 to 18 months away, needless to say there are some industries we should probably avoid. Even with the financial assistance provided by the government, the prevailing future of the travel industry will remain uncertain. In addition, we should avoid the consumer discretionary sector or companies that sell high ticket items that are elective in nature.
The preference should be to focus on growth and income stock ideas. I have never liked buying stocks just for their dividend yield; I want to own shares in growing businesses that can thrive during times of uncertainty and also recover once the economy expands again.
Many economists believe that a recession is very likely, where economic output contracts for two consecutive quarters. Given a high probability of economic slowdown, we should focus on companies that provide essential products or services, have strong brand names and operate with efficiency and scale.
Below are my top 10 stock picks for this current environment:
- Abbot Laboratories (ABT) – Abbot is one of the largest and most diversified healthcare and medical products worldwide. The company pays a 2.3% dividend yield and it should be a defensive stock even if the economy slows down.
- Amazon (AMZN) – Amazon is the dominant online retailer that people cannot get enough of. The company has products for the smart home (Alexa) and is a leading cloud software player with Amazon Web Services. In the midst of COVID-19, Amazon is trying to hire 100,000 more workers to meet increased demand.
- American Tower (AMT) – American Tower is a real estate investment trust that owns and operates cell towers. The industry has high barriers to entry and mobile traffic will only increase over time. The stock has a 2.2% dividend yield.
- Costco Wholesale (COST) – Costco operates membership warehouses in the U.S. and around the world. Long lines and empty shelves became a daily occurrence at Costco during the COVID-19 outbreak. People need to shop for basic necessities and I don’t see any slowdown in demand for the foreseeable future.
- Equinix (EQIX) – Equinix is a real estate investment trust that operates data centers around the world. More than half of the Fortune 500 companies are customers of Equinix. The stock offers a 2.2% dividend yield and is a great way to play the long term growth in cloud data traffic.
- Johnson & Johnson (JNJ) – J&J is one of the largest healthcare products companies in the world. From pharmaceuticals to medical devices, the company offers a wide range of products and has a 3.4% dividend yield.
- Microsoft (MSFT) – Microsoft offers personal and business products that are essential to everyday life. It has also successfully built a cloud computing business, Azure, and will bounce back along with the global economy.
- Procter & Gamble (PG) – P&G is a leader in providing branded consumer packaged goods, including Tide, Charmin, Cascade, Fabreze, Pantene, etc. Offering a diverse portfolio of household necessities will help the company weather any storm. The stock has a 3.0% dividend yield.
- Verizon Communications (VZ) – Verizon provides communication services to consumers and businesses. The stock should be defensive in times of volatility since people will continue to pay their monthly cell phone bills. The stock has an attractive 4.8% dividend yield.
- Waste Management (WM) – Waste Management is the largest provider of waste management environmental services in the U.S. Nobody in the industry can match the scale of WM and it has not disappointed long term investors. The stock has a 2.4% dividend yield.
We discussed in our previous blog the pros and cons of investing in individual stocks and not just Exchange Traded Funds. It’s very important to dollar cost average into individual stocks, especially given these volatile times. Buy a small position and then add to that over time. I own each of the stocks listed above and plan to add more if their prices continue to fall. Patience is a virtue when it comes to investing.
Nobody knows how long the market will be under distress and when it will bounce back. I’m not saying the bear market we have just entered into is going to be like the financial crisis of 2008. We should keep in mind that back then the market peaked in November 2007 and bottomed in March 2009 – which is almost 16 months! The fact is, the bottom is only evident sometime after the crisis is over. As always, having an investment plan and sticking to it is advice I would give to anyone. Good financial planning, especially during a crisis, will protect your family in the long run.