Most executives take a recession in the United States for granted
Companies with high profitability and low debt seem the best bet
These 5 companies have the necessary financial and operational strength
Investors are looking for companies that can survive a possible recession. And in that context, high-yield, low-debt stocks seem like a good bet. In a recent survey of Wall Street Journalmost of the directors of important organizations affirmed that the recession has already begun or will begin in the next 12-18 months.
Here are five stocks that I believe have the financial and operational strength to weather a recession with flying colors. Each of them has achieved a return on equity of 17% or more in the past year, and has debt equal to 10% of equity or less.
Modern (mRNA)based in Cambridge, Massachusetts, burst into the public consciousness when it developed a vaccine against Covid-19, first approved in early 2021.
In 2019, Moderna’s revenue had been $60 million in 2019. In the last quarter it was more than 300 times higher: $22.6 billion. Many carriers reckon that as the Covid pandemic winds down, so will Moderna’s revenue. That’s why stocks trade at a paltry multiple of four times earnings.
I would bet on the opposite. Company officials believe that its messenger RNA technology can be applied to other diseases. If they are right, the benefits are enormous.
I haven’t owned for years teradyne, American designer and manufacturer of automatic test equipment; but I’m taking another look. Headquartered in North Reading, Massachusetts, Teradyne has averaged 12% growth in annual revenue over the past decade. It has made a profit in 12 of the last 15 years. Its return on invested capital was more than 52% last year, and 34% last quarter.
Investors naturally worry about boom and bust cycles in the semiconductor industry. The industry has seen plenty of them. But right now there is a global shortage of semiconductors, so I expect Teradyne earnings to remain strong.
A year ago I recommended Logitech International S.A. (LOGI) and it went very badly. But the Swiss manufacturer of keyboards, mice, webcams; It has an excellent track record of profitability.
LOGI’s return on invested capital has been greater than 17% in 11 of the last 15 years. I consider anything above 10% to be good. If you had owned Logitech stock for the last decade, you would have nearly quintupled your money.
When I recommended it a year ago, the stock was on the expensive side. But today it is trading at less than 15 times recent earnings. A recession could put a dent in sales for a while. But with no debt on its balance sheet, I think Logitech would hold up just fine.
Americans have steadily increased their consumption of chicken. In 1985 it surpassed pork in popularity and in 1992 beef. Laurel, Mississippi-based Sanderson Farms is the nation’s third-largest chicken producer, with close to a 10% market share. Last year, it agreed to be acquired by a joint venture between Cargill and Continental Grain, for $203 a share.
That merger is on hold while the US Department of Justice investigates it. Meanwhile, the shares have risen to $208. Assuming Sanderson stays independent, I think it’s a good investment. Debt is only 1% of equity. Shares are trading at just five times earnings.
What product can be more prosaic than refrigerator coils? Mueller Industries manufactures them, along with 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 years straight (as far as my database goes). That includes the Great Recession of 2008-2009.
Article published in Forbes US.