With China and the United States continuing to exchange salvos in a trade war, political uncertainty stemming from the impeachment proceedings underway in Washington, and the recent report that consumer spending slowed significantly in August, many pundits are positing that we're poised to enter a recession.
The thought of a recession may be unsettling, but there are steps investors can take to help protect their portfolios from an economic downturn, including investing in companies that can withstand the turbulence -- stocks like Franco-Nevada (TSX:FNV), Idexx Laboratories (NASDAQ:IDXX), and Casella Waste Systems (NASDAQ:CWST).
Go for the gold
When looking for ways to play it safe, many investors gravitate toward gold. During the Great Recession, for example, as the S&P 500 plunged nearly 38%, the price of gold climbed more than 19%.
But this simple strategy comes with a variety of options, including the buying of bullion, gold exchange-traded funds, or gold mining stocks. One of the best options currently available to investors, however, is royalty and streaming company Franco-Nevada. Digging metals out of the ground is a capital-intensive endeavor, so mining companies often make deals with royalty and streaming companies, which provide them with money upfront in return for the rights to purchase a certain amount of gold (or other metal) at a preset discounted price, or to receive a percentage of mineral production from a mine. Consequently, Franco-Nevada can profit from the successful development of mining assets, yet it is involved in neither the development of the projects nor their operations, thus reducing its risk.
Although Franco-Nevada has exposure to silver, platinum group metals, and other commodities, gold is the greatest contributor to its bottom line. In 2018, for example, gold accounted for 63% of the company's adjusted EBITDA. With 55 energy-related assets in its portfolio, the company is clearly interested in more than the yellow stuff, but with 38 precious metals projects in the advanced development phase and 200 more in the exploration phase, investors can be sure that gold will continue to play a central role in the company's portfolio in the future. In fact, management's stated intent is to generate 80% of revenue from precious metals over the long term.
This dog could have its day
Eating out less often or passing on the latest Hollywood blockbuster at the multiplex are just a couple of ways people may choose to tighten their belts during a recession. And when it comes to pets, they might wait a bit longer to buy a new chew toy for Fido after he destroys the old one. But one area where people aren't likely to economize is on providing adequate health care for their furry little friends. Therefore, Idexx Laboratories, which proclaims itself "the global leader in veterinary diagnostics, software, and water microbiology testing," is a naturally appealing stock to hold during steep economic downturns. Although the company provides services for a wide range of animals, from pets found in the home to livestock on the farm, it's the former category that comprises its largest business. In 2018, the companion animal group (CAG) segment -- i.e., its pet health business -- accounted for 87% of overall revenue.
Idexx Laboratories has a geographically diversified footprint, delivering its solutions to customers in more than 175 countries. How does this relate to its financials? Customers outside the U.S. represented 39% of revenue in 2018. This global exposure could mitigate the company's risk in case of a U.S. recession.
There's no getting around taking out the trash
While some local initiatives may take a back seat during financially troubled times, neglecting the local dump is not an option for municipalities. Consequently, companies that deal in trash and recycling services, like Casella Waste Systems, which operates in six states in the Northeast, are a compelling option for investors concerned about a recession. But it's not merely the fact that Casella Waste Systems can expect the demand for its services to remain strong through trying economic times that makes it attractive. It's also management's commitment to improving the company's financial health.
The company has reduced its total debt from $537 million in 2014 to $496 million as of the end of Q2 2019. Furthermore, it has reduced its consolidated net leverage ratio from 5.4 in 2014 to 3.2 as of the end of the recently completed second quarter. Recognizing the more secure financial position that the company has achieved, S&P Global Ratings upgraded its debt rating from B+ to BB- this past February, and Moody's followed up with an upgrade from B1 to Ba3 this past June. And management recognizes that its work at shoring up the balance sheet isn't over. It has targeted a consolidated net leverage ratio of 3 to 3.25 by 2021.
Besides the less debt-laden balance sheet, the company's ability to generate strong cash flow makes it an attractive option for investors. Whereas free cash flow represented 2.8% of sales in 2015, it represented 6.1% of sales in 2018, according to Morningstar. And management forecasts that free cash flow will grow 10% to 15% annually through 2021.
The recession-ready stocks recap
When considering how to prepare a portfolio for a recession, there are typical approaches such as gaining exposure to gold -- one of the most common safe-haven investments. And for investors who find this desirable, Franco-Nevada's business model as a specialized financier of sorts is a compelling option. Those who prefer to avoid exposure to gold may be more interested in Idexx Laboratories and Casella Waste Systems -- two companies that deal in products and services that will undoubtedly remain in high demand, even during the most challenging of economic periods.