It's been more than a decade since the last U.S. recession. That long period of uninterrupted growth has been great for investors, but many people are concerned it may be coming to an end.
If we do enter a new recession, it's likely that many of today's top outperformers will be outperformers no longer. But what stocks can you buy to get your portfolio ready for a recession? This month, you might consider taking a stake in Waste Management (WM 0.79%), Royal Dutch Shell (RDS.A) (RDS.B), and Brookfield Infrastructure Partners (BIP -0.47%). Here's why these look like good buys right now.
In a recession, even top stocks can falter. Investing in recession-ready industries can help. Image source: Getty Images.
Like death and taxes
The only sure things in life, some people say, are death and taxes. But you can probably add trash as a third item in that list. As long as people use, well, anything, they're going to need to throw something away, whether it's packaging, consumables, or whatever that thing was in the back of the fridge that's now turned blue. And with a growing population, the amount of trash we make is growing, too.
All that trash needs to be taken away and put somewhere, and that's where Waste Management comes in. As the largest trash hauler and landfill operator in North America, Waste Management is responsible for collecting trash for municipalities across the country.
The company has three things that make it a recession-resistant business:
- It's a necessary service. No matter how bad the economy is, you can't have trash piling up on the streets.
- It's largely governed by long-term service contracts, and the vast majority of customers tend to stick with their existing trash provider. Customer churn for Waste Management in the most recent quarter, for example, was just 9.8%, and that's high for the company.
- It has high barriers to entry. Because of the enormous amount of infrastructure needed -- not to mention red tape required -- to open a landfill, the competitive moat is quite wide.
A couple of recent share price drops have knocked Waste Management's price-to-earnings ratio down to 27.5. That's a bit higher than I'd like, but it's still below 30, the level at which I think shares would be overvalued. Remember, recession fears have been around for years now, and a lot of investors have already jumped into Waste Management's stock. With the price at an acceptable valuation, you might consider doing the same this month.
We've been here before
If you want to know how a company is likely to handle a recession, you can always look at how it's fared in a past recession. For oil major Royal Dutch Shell, though, we have a more recent example we can look at: how the company fared during the oil price downturn of 2014-2017.
During that prolonged slump, Shell's share price did take a hit -- and, to be honest, it's never fully recovered -- but what's more important was how Shell's management reacted to the problem. First, it implemented important cost-cutting initiatives to help it make money in the "new normal" of lower oil prices. Those measures are still in place today, and would help Shell weather a potential recession-related oil price drop.
Second -- and probably more importantly -- Shell didn't cut its dividend during the downturn like many other oil companies. As a result, the company's current yield of 6.3% is the highest among the oil majors. Better yet, a recent price drop offers a buying opportunity. Dividend-paying stocks with a good track record of not cutting those dividends in bad times are excellent choices during an economic slowdown, and so Shell should be on your list of potential recession-ready stocks to buy now.
Everything but the kitchen sink
Trash service is still essential during a recession, as is oil and gas for transportation and heating. But there are a lot of other essential services -- electricity, roads, ports, telecom -- that are still going to be going strong even in the event of a recession. Luckily, investors in master limited partnership (MLP) Brookfield Infrastructure Partners will add all of those sectors to their portfolio in one fell swoop, thanks to the company's diversified collection of assets.
Led by the capable team at Brookfield Asset Management (BN 0.40%), Brookfield Infrastructure Partners owns infrastructure assets across the globe. Better yet, the vast majority of those assets generate reliable cash flow, either because of long-term contracts or regulation. Management has recently been implementing a new policy of selling underperforming assets to purchase more attractive ones, rather than using debt to finance those acquisitions.
Like Waste Management, Brookfield's units have been on a tear lately, probably partly thanks to fears of a recession, so its enterprise value-to-EBITDA ratio -- a good metric for evaluating infrastructure investments because it strips out depreciation -- is, at 13.2, toward the upper end of its five-year range. However, there's little doubt that Brookfield is an excellent recession-ready stock, so interested investors may want to buy in now even though it isn't a screaming bargain.
A different way of thinking
When you're investing with a potential recession in mind, standard metrics like growth potential and value are still important, but you also need to consider things like how essential a company's services are, how stable its income stream is, and how likely it is to make business decisions that benefit shareholders over the long term.
Waste Management, Royal Dutch Shell, and Brookfield Infrastructure Partners have largely proben themselves on those fronts, and are excellent recession-ready stocks to consider buying this month.
