5 stocks that could hold up
Suddenly, investors are looking for companies that can survive a possible recession. Companies with high profitability and low debt seem like a very good bet.
Most business leaders, in a recent Wall Street Journal poll, said a recession has already started or will start within the next 12 to 18 months. I put the odds at around 40% this year and 60% next year.
Here are five stocks that I believe have the financial and operational strength to weather a recession in good shape. Each has achieved a return on capital of 17% or better over the past year and has debt at or below 10% of equity.
Moderna inc. (mrna, Financial), based in Cambridge, Massachusetts, burst into public consciousness when it developed a vaccine for Covid-19, first approved in early 2021.
Moderna’s revenue was just $60 million in 2019. Over the past four quarters, it was more than 300 times larger, or $22.6 billion. Many marketers believe that as the Covid pandemic eventually subsides, Moderna’s revenue will also decline. That’s why stocks trade at a paltry multiple of four times earnings.
I would bet the other way around. Company executives believe its messenger RNA technology may be applicable to other diseases. The advantage is enormous if they are right.
I have owned Teradyne Inc. for years (TER, Financial), which manufactures semiconductor test equipment. But I take another look.
Based in North Reading, Mass., Teradyne has recorded average annual revenue growth of 12% over the past decade. It has made a profit in 12 of the past 15 years. Its return on invested capital was over 52% last year and 34% last quarter.
It is natural for investors to worry about the cycles of feast and famine in the semiconductor industry. The industry has seen a lot. But right now, there’s a global shortage of semiconductors, so I expect Teradyne’s earnings to stay strong.
I recommended Logitech International SA (LOGI, Financial) a year ago and it went terribly well. But the Swiss manufacturer of computer peripherals (keyboards, mice, webcams, etc.) has a superb profitability record.
Its return on invested capital has exceeded 17% in 11 of the past 15 years. I consider anything over 10% to be good. If you had owned Logitech stock over the past decade, you would have almost quintupled your money.
When I recommended it a year ago, stock was expensive. But today, that’s less than 15 times recent earnings. A recession could reduce sales for a while. But without debt on its balance sheet, I think Logitech would hold up well.
Americans have steadily increased their chicken consumption. In 1985 it overtook pork in popularity and in 1992 it overtook beef.
Sanderson Farms Inc. (SAFM, Financial), based in Laurel, Mississippi, is the third-largest chicken producer in the nation, with nearly 10% market share. Last year it agreed to be acquired by a joint venture of Cargill and Continental Grain for $203 per share.
This merger is on hold while the US Department of Justice investigates. Meanwhile, the stock rose to $208.
Assuming Sanderson stays independent, I think it’s a good investment. Debt represents only 1% of equity. The shares trade for only five times earnings.
What product could be more prosaic than refrigerator coils? Mueller Industries Inc. (IML, Financial) manufactures them, as well as a wide variety of tubes, valves, heat exchangers and other forgings.
Mueller, based in Memphis, Tennessee, was founded in 1917 and has been profitable for at least 30 consecutive years (as far back as my database goes). This includes the Great Recession of 2008-09.
It’s the 18the column I wrote on high-yield, low-leverage stocks.
My picks from a year ago were the worst of the previous 17 years, down 39%. The worst performers were Turtle Beach Corp. (TO LISTEN, Financial), down 59%, and Logitech International, down 58%. Also in the red were Sturm Ruger & Co. (RGR, Financial), down 22%, and Gentex Corp. (GNTX, Financial), which fell 17%.
By comparison, the Standard & Poor’s 500 Total Return Index fell 11.8%.
The long-term picture is better. Of the previous 17 columns, 11 showed a profit and 10 beat the index. The one-year average return of my picks was 10.8%, versus 9.0% for the index.
Keep in mind that the results in my column are hypothetical and should not be confused with the results I get for clients. Also, past performance does not predict the future.
John Dorfman is president of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His company or his clients may own or trade in the securities discussed in this column. He can be reached at [email protected].