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3 Top Stocks to Recession-Proof Your Portfolio

By Leo Sun - Feb 9, 2020 at 12:00PM

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An off-price retailer, packaged foods giant, and healthcare juggernaut all generated consistent growth during previous recessions.

The 2010s marked America's first full decade without a recession since the Great Depression. That's an impressive growth spurt, but it also suggests that investors should count on an increased chance of a recession in the next few years.

It's foolish to sell all of your stocks on those fears, since it's generally futile to predict the depth and length of a recession. But it's also foolhardy to assume that all of your stocks will bounce back after a recession.

Instead, investors should accumulate shares of companies that flourish during economic downturns or remain naturally insulated from macro headwinds. Today, I'll cover three stocks that fit that description: The TJX Companies (TJX -5.76%), PepsiCo (PEP 0.63%), and Johnson & Johnson (JNJ 1.75%).

A warning sign reading "Recession Ahead".

Image source: Getty Images.

1. TJX Companies: A retail survivor

TJX, which owns off-price retailers TJ Maxx, Marshalls, HomeGoods, HomeSense, and Sierra Trading Post, expects to post its 24th straight year of comparable store sales growth this year. In other words, it grew through the past two recessions and the ongoing retail apocalypse that's crushed many other brick-and-mortar retailers.

TJX weathered those storms with two main strategies: It bought excess inventories from struggling retailers and sold that inventory at lower prices than Amazon (AMZN 0.25%), and it rotated its product selections quickly to bring shoppers back for "treasure hunts."

As other struggling retailers shutter stores to cut costs, TJX is opening more stores to address the growing market demand for off-price retailers. TJX also raised its dividend annually for 23 straight years, so it could soon become a "Dividend Aristocrat" of the S&P 500 -- an elite title given to members of the index that have raised their payouts annually for at least 25 straight years.

Analysts expect TJX's revenue and earnings to rise 6% and 9%, respectively, next year, and the stock trades at 22 times forward earnings and pays a forward yield of 1.5%. TJX's valuation is a bit high relative to its growth, but this well-run retail survivor will likely withstand the next recession just as well as the previous ones.

2. PepsiCo: A packaged foods giant

Packaged foods companies struggled in recent years as private-label brands crowded supermarket shelves and consumers pivoted toward healthier foods. Yet PepsiCo's diverse business -- which includes its namesake sodas, other beverages, Frito-Lay snacks, and Quaker Foods -- withstood that industry downturn during past recessions.

A glass of cola on a restaurant table.

Image source: Getty Images.

PepsiCo evolved by expanding its beverages portfolio beyond sodas with teas, juices, bottled water, sports drinks, energy drinks, and coffee, and reviving its packaged foods brands with new brands, flavors, and healthier variations. It also hiked its prices to offset slower shipments and expanded aggressively across higher-growth markets like Asia, the Middle East, North Africa, and Latin America.

PepsiCo expects its organic sales to rise at least 4% this year, and analysts expect its revenue and earnings to grow 4% and 8%, respectively, next year. It's also a Dividend Aristocrat that's hiked its dividend annually for 47 straight years, and currently pays a decent forward yield of 2.7%.

PepsiCo's stock isn't cheap at 24 times forward earnings, but its stable growth, wide moat, and diverse portfolio of beverages and drinks make it an ideal defensive stock to hold during a market downturn.

3. Johnson & Johnson: A classic dividend stock

Johnson & Johnson, which has raised its dividend annually for 57 straight years, is another favorite Dividend Aristocrat for long-term investors.

J&J's stock rallied nearly 300% over the past 20 years, and the past two recessions barely dented its long-term growth. The healthcare giant easily withstood those downturns, as demand for its three product categories -- pharmaceuticals, consumer healthcare, and medical devices -- remains stable throughout economic booms and busts.

J&J's high-growth pharmaceutical unit continues to grow as newer drugs like Imbruvica, Darzalex, and Stelara offset declining sales of Remicade, its former blockbuster arthritis drug, which faces generic competition. Its consumer healthcare and medical device units also remain stable despite weathering recent lawsuits regarding the safety of its baby powder and pelvic mesh devices.

Analysts expect J&J's revenue to rise 5% and 7%, respectively, next year. The stock trades at just 16 times forward earnings and pays a forward yield of 2.5%. Those steady growth rates, which weren't significantly dampened during previous recessions, make J&J another solid defensive stock for conservative investors.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$176.98 (1.75%) $3.04
Pepsico, Inc. Stock Quote
Pepsico, Inc.
$162.21 (0.63%) $1.01
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
$57.87 (-5.76%) $-3.54, Inc. Stock Quote, Inc.
$2,151.82 (0.25%) $5.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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