3 stocks to buy in a recession
There are many ways to invest in a recession. So let’s discuss three different ways and suggest three actions, along with alternatives for investors. The three titles watsco (BSM -0.85%), Corteva (VAT -1.24%)and Cognex (CGNX 0.88%)have nothing in common, but they all represent investment themes that could work in a downturn.
Three ways to invest in a recession
There’s no surefire way to invest in a recession, but here are some solid options:
- Stocks with strong balance sheets and the ability to improve long-term prospects during a recession, such as Watsco and Honeywell International.
- Stocks whose end markets are not necessarily affected by the direction of the economy. One example is the agricultural sector, with companies like Corteva, Deereand FCM.
- Long-term growth stocks that are battered during a recession, providing investors with an opportunistic entry point. There are many options here including Cognex, CTPand fortified.
The heating, ventilation, air conditioning and refrigeration (HVACR) parts distributor’s incredible success story over the past two decades comes down to its “buy and build” strategy. His activity is relatively simple but very successful. Service contractors come in to repair/maintain HVACR equipment and order parts from a distributor like Watsco.
The company has grown by consolidating a highly fragmented market characterized by companies operating in local markets. Through an ongoing series of acquisitions, Watsco has grown geographically and expanded its product line. As acquired companies operate locally, there is little cannibalization. Plus, being part of the Watsco network helps them operate more efficiently, with access to more parts and Watsco’s digital platforms (e-commerce enabled websites, etc.).
The key to his “buy in a recession” argument is that any economic weakness can encourage smaller distributors to sell. Given Watsco’s strong balance sheet and market-leading position, the company is uniquely positioned to capitalize on it.
The agricultural sector tends to march to the beat of its own drum. Earnings from stocks in the sector are not dependent on the direction of the economy – a good quality in a recession. As you can see below, the price volatility of major crops like wheat, soybeans and corn over the years does not really reflect the volatility of the global economy.
In this line of thinking, buying stock in seed and crop protection company Corteva makes sense. The company is attractive because management has an opportunity for significant margin expansion by cutting costs and selling more products with its own technology rather than paying costly royalties to other companies for complementary products (e.g. example, another company’s herbicide alongside Corteva’s herbicide resistant seeds).
So far, so far so good on that front, with its own Enlist system (crop protection and seeds resistant to said crop protection) planted on 45% of soybean acres in the United States in 2022. That gives Wall Street the confidence to predict a strong recovery. profit margin in the years to come, and Corteva has a lot of long-term earnings potential.
Not much has gone right for machine vision company Cognex in 2022. However, faced with significant supply chain issues and component shortages during the year, management made the conscious decision to invest (at the expense of profit margins) to deliver products to customers. It’s a good thing to do for a company establishing its technology with important customers like Apple (and eventually Amazon).
However, that’s where the good news ends, as its top three end markets, logistics (e-commerce warehousing), consumer electronics, and automotive, have all suffered this year. After a few years of scorching growth, e-commerce companies are cutting investment, while consumer electronics and automotive production will be weaker than expected at the start of the year due to a slowdown in consumer spending and problems supply chain persistence. Start a fire at its main contractor (damaging Cognex inventory), and it’s been a year to forget.
Unsurprisingly, Cognex stock is down 43% in 2022 and 50% last year, and if a recession hits, it could drop even further. However, nothing has really changed in its long-term growth prospects, so if you’re ready to buy a stock and ride out potential short-term volatility, then Cognex is attractive. Additionally, the company is building strong relationships with leading companies, which will likely lead to greater adoption of machine vision technology.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Lee Samaha holds positions at Honeywell International. The Motley Fool holds positions and recommends Amazon, Apple, Cognex and Watsco. The Motley Fool recommends PTC and recommends the following options: $120 Long Calls in March 2023 on Apple and $130 Short Calls in March 2023 on Apple. The Motley Fool has a disclosure policy.