Recessions are inevitable for most economies. In most cases, when they happen, recessions tend to lead to a sharp decline in most stocks. It happened during the dot com bubble, the 2008/9 financial crisis, and even during the coronavirus pandemic.
These stocks decline because a recession leads to high unemployment rate and a rush to safety among investors. However, some companies tend to perform well during recessions. For example, during the coronavirus recession, technology companies like Zoom Communications, Slack, and Fastly did well.
Similarly, in the financial crisis of 2008, discount chains like Dollar General and Ross Stores outperformed most stocks. In this report, we will identify five of the best stocks to buy and hold during a recession.
Microsoft is the second-biggest company in the world with a market cap of more than $1.5 trillion. It is also one of the biggest SAAS company in the world, serving millions of companies from around the world. Most importantly, Microsoft is the second-biggest cloud computing company in the world after Amazon.
There are two main reasons why Microsoft is a good company to invest in during a recession. First, the company provides solutions that companies must use even during a recession. For example, companies who use Microsoft 365 must continue using the products no matter what. Similarly, Azure clients must continue paying for the cloud services it offers even during a recession. The same is true with other products it offers like Dynamics and its digital security products.
Second, in times of a recession, you want to buy and hold a company with a strong balance sheet. And Microsoft has one of the best balance sheets in the US. It has more than $136 billion in cash and about $60 billion in net debt. That means that the company can sustain its operations and dividend payouts even in a long period of recession. The chart below shows how Microsoft performed against the S&P 500 during the coronavirus recession.
Microsoft vs S&P 500
Dollar General (DG)
Dollar General is the biggest discount store company in the United States with a market cap of more than $50 billion. The company offers consumable products that are often priced at about $1. It has more than 13,000 stores in the country.
The case for Dollar General is relatively simple. In a recession, many people lose their jobs and start looking for discounts especially for fast-moving consumer goods. That is the reason why the company tends to do well when there is a recession. In 2008, the company was among the best-performing stock in the S&P 500. And during the COVID-19 recession, the stock outperformed the benchmark indices. Indeed, as most companies laid-off employees, it added more than 50,000 people.
There are other reasons why Dollar General is one of the best stock to own during a recession. First, the company has been growing its sales and profitability. Total revenue has jumped from $13 billion in 2011 to more than $27 billion in 2019. Its operating income has almost doubled. Second, the company has a relatively conservative balance sheet. And, 78% of its income comes from consumables, which tend to do well during a recession.
Dollar General vs S&P 500 during the coronavirus pandemic
Houlihan Lokey (HLI)
Banks are usually among the worst-performers during a recession. In the 2008 crisis, they were blamed for causing the crisis, leading to huge fines. Also, during a recession, banks allocate billions of dollars to bad debt. Most importantly, during a financial crisis, central banks tend to lower interest rates, which affects the profitability of banks.
But Houlihan Lokey is a different type of bank. It is a small bank with a market cap of more than $4 billion that most people have never heard of. But all investment banks have heard about the firm. The company focuses on corporate finance, financial restructuring, and financial and valuation advisory.
The financial restructuring segment is the main reason why Houlihan is a great bank to invest in during a recession. That is because the bank is well-known in the financial community for these services. And restructurings rise during a recession.
The company is called upon to help with some of the most complicated restructurings and bankruptcies. For example, it worked in 12 of the biggest 15 bankruptcies in the US in the past decade. That includes firms like Lehman Brothers, Washington Mutual, Worldcom, and General Motors. As shown below, the firm has a big market share in these services.
Houlihan Lokey is the biggest restructuring firm in the US
The chart below shows that the company’s stock outperformed the S&P 500 and the SPDR Banking ETF during the coronavirus recession.
Houlihan Lokey vs S&P 500 and SPDR banking ETF
Salesforce (CRM) is relatively similar to Microsoft. The company offers marketing, relationships, and analytics services to thousands of companies around the world. It offers these services through a subscription model, which is an excellent model because it locks customers in long contracts.
At the same time, Salesforce companies are unlikely to cancel their subscriptions because of a recession. For example, customers like Amazon, Toyota, and T-Mobile have no viable alternative to the company.
Another reason why Salesforce is an ideal recession-proof company to invest in is its diversity of products and services. For example, in addition to its customer relations software, it offers business intelligence services through Tableau, e-commerce infrastructure through Demandware, and cloud integration through MuleSoft. Further, Salesforce has an excellent management team and a healthy balance sheet.
Salesforce vs S&P 500
PayPal is the biggest fintech company in the world with a market cap of more than $200 billion. The company is used by millions of people and businesses every day to send money. By September 2020, it had more than 230 million users. In addition to PayPal, the firm owns other platforms like Venmo, Xoom, Honey, and Braintree.
PayPal is an ideal recession-proof company to invest in for three key reasons. First, people tend to send money to their friends and relatives during a recession. Second, more companies tend to turn to freelancers in their bid to save operation costs. Most freelancers are usually paid using PayPal. Third, like the previously-mentioned companies, PayPal has a strong balance sheet, with more than $10 billion.
PayPal outperformed the S&P 500 during the coronavirus recession
Recessions are usually the worst periods for most long-term investors because stocks tend to decline. However, since companies are not created the same, some tend to do better during the recession. In addition to the five that I have mentioned, some of the other firms that do well are pharmaceutical companies like Amgen, utilities like California Water Service, and consumer goods companies like Procter & Gamble.