If There Were A Recession: My Top Picks In Case Of An Economic Downturn

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Includes: BUD, CNK, NFLX, T
by: William North
Summary

There is much debate over whether or not a recession is looming.

Hedging with these three securities can protect your portfolio in a downturn.

Consumer trends change during a recession and these three securities will benefit.

There have been countless articles for or against the idea of a looming recession; however, in this article, I am not going to argue for or against the idea of the potential recession, rather provide potential stocks for those who believe a recession is looming but who potentially want to hedge against such a recession. That being said, these are my top three securities to own in an economic downturn.

AT&T (NYSE:T)

I mentioned this previously in my article “My Top 3 Discounted Dividend Picks For 2019” but my first pick comes from the Utility Sector and is AT&T. Telecom is seen as an outperformer during a recession because the products they sell will, for the most part, be bought regardless of the state of the economy. Think about it: Would you really ever get rid of your internet or cellular service? Of course not, you wouldn’t be able to trade online or read articles on Seeking Alpha if you did! All jokes aside, the demand for the goods and services offered by telecom companies is pretty inelastic, especially compared to other sectors of the economy. This was seen when AT&T’s sales grew slightly over the course of the 2008 recession, showing the consumer continued to buy AT&T’s products throughout the recession.

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“But William, have you seen AT&T’s stock chart over the last recession? It went down over 50%!” Keen observation and it is true, AT&T’s stock price fell from $42.97 in December, 2007 to $21.44 in March, 2009, a 50% decline. I have two responses to that: First, AT&T has already dropped 39% from its peak in 2016 of $43.89 during its low in mid-December. Second, AT&T’s dividend yield is at historic highs, supporting the idea AT&T is potentially near a bottoming point.

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Lastly, AT&T’s dividend provides a partial safety net against a further decline in the stock price. I’m not saying that I believe AT&T’s stock price is going to be really hit because I don’t. That being said, even if there were to be a decline in the stock price, the dividend would help supplement potential losses. Also, in an economic down turn, interest rates decrease and dividend stocks become more attractive as the spread between the dividend yield and government bond yields move further from one another. (I know there has been a lot of debate over the security of AT&T’s dividend but I believe it will be safe, even in the case of a economic downturn. You can read more about my opinion here.)

Anheuser-Busch InBev (NYSE:BUD)

Although BUD has struggled as of late, a recession may actually be the catalyst it needs to boost its stock price. First, total alcohol consumption increases during a recession. Although it would make sense for alcohol consumption to decrease during a recession as people have less money to spend, researchers at the University of Miami found out people tend to deal with the stress and depression of an economic downturn by turning to alcohol. Second, there will be a shift from expensive alcohol to low-priced alternative quality alcohol as people will choose the lower priced alcohol when they have less disposable income. In the past few years, BUD has struggled as consumers began shifting towards imports, spirits, and wines.

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As the income statement shows, sales as well as EBITDA for BUD about doubled over the the last recession, supporting the idea that BUD will thrive during the next recession.

Source: Think or Swim

Technically, BUD has bounced nicely off of a long term support around $65. This trend line was tested twice as a resistance in October 2010 and April 2011. The same level was tested as a support in June 2012. Recently, BUD has bounced off of this support level nicely and is set up for continue gains, with the next largest resistance being around $100.

Netflix (NYSE:NFLX)

This pick kind of sticks out like a sore thumb. Why would I pick a growth name over a value name when talking about a recession? The answer is actually quite simple. During a recession, people tend to have more time on their hands as many are out of work. As a result, they need to find something to fill that time and there’s nothing better than binging Netflix to pass the time.

During 2009 recession, movie ticket sales increased 17.5% for two reasons. First, those who were unemployed looked to pass the time and will spend more time on entertainment. Second, movies became cheaper alternative for entertainment. In a quote, The New York Times caught this sentiment perfectly: “‘Spending hundreds of dollars to take them to Disneyland is ridiculous right now,’ she said. ‘For $60 and some candy money I can still be a good mom and give them a little fun.’” The impact of this trend is well shown in Cinemark Holdings, INC (CNK) during the 2008 recession.

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I think Netflix will benefit from this recession trend for two reasons. First, unemployed people will have more and will look to fill that free time, resulting in more people subscribing to Netflix to fill that free time. Second, people will look for cheaper entertainment options and will find Netflix to be a great alternative.

Final Thoughts

To an investor, a recession is a scary thought. If you’re afraid of an upcoming recession or want to reduce risk, these three picks may be the way to go. After all, I can easily see people streaming Netflix (NFLX) on AT&T (T) wifi, all while drinking a nice can of Budweiser (BUD).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.