Recessions are tough, that’s the reality. But amidst the doom and gloom there is always nuance, even if sensationalist headlines might have you believe otherwise. The global economy may slow for a while but the wheel will keep turning. And not all spending is ever impacted equally. Consumers and businesses may tighten their belts and reassess their priorities, picking and choosing their battles. But they won’t stop spending entirely.
While spending on some things might be completely paused and reduced for others, it will also increase for other goods and services. Cheaper alternatives to big brand consumer products could see their sales rise as buyers look for ways to reduce their groceries spend without reducing general consumption.
Things might be purchased that wouldn’t in an effort to save money. For example, someone might buy a wrench and try to do some DIY plumbing informed by YouTube explainer videos rather than call out a plumber. The plumbing company would have lost out but the wrench retailer has a sale they wouldn’t have if economic sentiment and conditions were better.
A company might decide not to push back hiring the software developers they were planning to until the storm clouds pass. But they could instead turn to an IT outsourcing company providing cheaper remote alternatives in an emerging economy for work they feel can’t be put off. That might mean a UK-based software developer doesn’t get the pay rise they would have for moving jobs but the IT outsourcer has a contract it wouldn’t have a few months earlier.
That is of course a very simplified picture. The economy is tightly interconnected and less money spent overall, even if it is moved around to the benefit of some companies, can quickly become a vicious circle. But it does hopefully illustrate that in almost every scenario there are financial winners and losers. In a recession, the number of winners compared to losers simply drops.
As a stock picker, that makes the job of making sure a portfolio has more winners than losers harder. But not impossible. These stocks all present good cases for why they may well prove resilient over the recession we have now entered.
Kraft Heinz – some trade-down risk but demonstrating strong pricing power
I mentioned in the intro that consumer belt tightening during an economic down period can mean a switch from brand consumer products to cheaper alternatives like supermarket own brands. However, not all consumer brands are as vulnerable as others. Kraft Heinz is one whose products seem to fall into the sweet spot of still being budget friendly enough to not only survive the shopping lift cut but allow for inflation-beating raise prices. That’s reflected by the fact its valuation is actually up over 5% this year.
Like London-listed Unilever, Kraft Heinz’s recent trading updates have indicated enough of its products have shown pricing power that is strong enough to withstand increases for end consumers. Demand has dipped but higher prices, up 15.4%, have more than compensated.
Kraft-Heinz’s most recent quarterly results showed 2.9% growth in net sales to $6.5 billion despite costly divestitures (6.4% impact) and currency headwinds (reducing net sales by 2.3%) despite sales volumes being down 3.8%.
If Kraft-Heinz successfully maintains pricing power and manages trade-down risks and supply issues, it should be in a good position to justify Goldman Sachs’s recent upgrade on the stock from neutral to buy. The investment bank’s analysts have a 12-month price target of $43 for the Heinz share price compared to its current level of $37.99.
That’s over 13% upside, which would be a phenomenal result set against what is expected to be tough market conditions over the next 12 months. For UK investors, Kraft-Heinz also offers exposure to a dollar-denominated stock and the potential for further uplift from currency movements if the dollar continues to strengthen against the pound, as the consensus expects it to.
Gilead Sciences – the strength of its HIV and oncology treatments business should hold up through a recession
Nasdaq-listed healthcare company Gilead Sciences is another stock that would see UK-based investors benefit from continued dollar strength and also has the kind of revenue streams that should prove resilient through a recession. Health, especially the treatment of life-threatening diseases, is not something that is usually cut back on and Gilead benefits from both current blockbuster drugs in the treatment of HIV and cancers and a strong-looking pipeline.
In its latest quarterly results, Gilead showed it is gradually replacing the loss of income that has resulted in a sharp drop in sales of its Remdesivir drug used to treat Covid-19. The crown jewel of its HIV/AIDs business is its Biktarvy treatment which has generated over $10 billion in sales to date and continues to grow quickly, with revenues up 22% year-on-year over the third quarter. Another HIV/AIDs treatment, Descovy, also showed 16% growth over the quarter.
In oncology, sales of Gilead’s Trodelvy treatment increased 78% in the third quarter after receiving European approval late last year. 13 non-U.S. countries are now covering the cost of the drug for patients and the company recently heralded “really strong launches” in France and Germany.
Gilead is in a strong financial position and returned $1.1 billion to shareholders in the last quarter with $928 million of that distributed as a dividend that pushed the yield to 3.7% and $180 million used for share buybacks. It also paid off $1 billion of debt early taking leveraging back to the levels it was at before the $21 billion acquisition of Trodelvy-maker Immunomedics.
Analysts at Piper Sandler and Truist Securities both recently upgraded the stock to respective overweight and buy ratings with price targets of $96 and $91, representing expected upsides of almost 21% and 14.5%.
Bunzl – a boring British business that ticks a lot of boxes
Bunzl is an incredibly boring business that sells a hotchpotch of the kind of things every business needs but nobody every thinks about from napkins to disposable coffee stirrers and cleaning products. It’s not sexy and the margins are tighter than a parent of 4 at an amusement arcade the week before the first post-Christmas salary hits the bank. But therein lies Bunzl’s secret.
The tight margins of this hugely efficient, large-scale niche wholesaler have meant it has never faced any really serious competition. The upfront capital and effort that would be required for anyone to seriously take Bunzl on for market share has always put potential competitors off.
And Bunzl’s scale gives it negotiating power with its own suppliers any new market entrant would struggle to match. The fact that even Amazon has never shown any real interest in taking Bunzl on is telling. It’s the kind of business the U.S. giant would normally be expected to cast covetous glances at but has shown no sign of interest in.
Bunzl’s growth over the years owes a lot of its successful integration of smaller companies it has acquired and it currently has £1 billion in cash on its balance sheet which could be deployed for a buying spree during the tough months ahead. Analysts still see plenty of room for growth in Bunzl and there doesn’t appear to be any serious competition to the company’s dominant market position on the horizon.
The upper range of 3500 pence set as the 12-month share price target by analysts polled by the Financial Times would represent over 20% upside. Even if the mid-point consensus of 2880p would see Bunzl’s valuation remain relatively flat, there is a 3.76% dividend yield at the current share price and not losing valuation will be better than most companies manage over the year ahead.
If Bunzl does put its £1 billion cash reserve to work as expected, it should also be in a strong position to benefit from the post-recession economic bounceback.
