No one likes to hear the word "recession," but consider this: Since 1854, the U.S. has experienced 33 recessions, ranging in duration from six months (1980) to 65 months (1873 to 1879). But through all those ups and downs, stocks have been one of the best assets to build wealth.
Navigating through a recession is quite simple. Avoid owning stocks with high debt levels and sluggish sales growth. If a company has a lot of debt and is struggling to grow in a strong economy, you shouldn't own it when consumers get strapped for cash during a recession.
Focus on companies that have plenty of cash in the bank and little or no debt. Invest in companies that are reporting strong growth in revenue with plenty of opportunity for long-term expansion. These stocks can not only survive a recession, but they tend to lead the charge when the next bull market begins.
Shopify: The massive e-commerce opportunity
Shopify's gains have been nothing short of amazing. The stock is up about 2,800% since its IPO in 2015, but I wouldn't call the shares overvalued. The e-commerce opportunity is so massive that Shopify should be able to keep growing sales even during a recession.
The stock will likely be volatile during a market downturn, but what ultimately matters is how the business performs. Shopify's gross merchandise volume totaled only $61 billion last year. That is just 1% of global e-commerce spending, which is currently growing around 20% per year. Shopify is capturing more of that spending in a hurry -- revenue soared 47% year over year in the fourth quarter. Plus, the company has zero debt.
Management continues to invest for future growth. They know they must keep investing and innovating to serve existing merchants and win over new ones. The latest move is to launch the Shopify Fulfillment Network, which could be a game-changer in allowing small merchants to better compete with Amazon and its Prime membership offer for free two-day or one-day shipping speed.
I would look at any drop in the stock price as a buying opportunity. Just as a smaller Amazon kept growing its sales through the 2008 recession and significantly outperformed the market, Shopify should be able to continue expanding its business through an economic downturn. There are so many merchants around the world who have yet to discover the value-enhancing suite of services that Shopify offers.
PayPal: Stretching its lead in digital payments
Like Shopify, PayPal should also continue growing revenue during a recession. The digital payment provider is more established than Shopify. It reported $199 billion in total payment volume for the fourth quarter alone, but its volume has been consistently growing in the 20% range. PayPal's consistent high growth speaks to the tectonic shift happening with more people migrating to a digital economy, which will likely continue in a soft economy.
PayPal is very profitable, generating $3.9 billion in free cash flow last year, while adjusted earnings rose 28%. Management is continuing to put that cash to work in acquisitions that are extending PayPal's capabilities beyond its core payments platform, such as the recent $4 billion deal to buy Honey Science, a software tool that helps users discover deals while shopping online.
PayPal has a growing user base of over 300 million, driven by the viral popularity of the Venmo app and the fast-growing peer-to-peer payments market. Plus, PayPal ended 2019 with $13.9 billion in cash and less than $5 billion in debt. It's financially strong and growing fast.
If Shopify's high valuation concerns you, you might like PayPal better. The stock trades at a more appetizing 34 times next year's earnings estimates.
Microsoft: Well fortified with $134 billion in cash
The software giant is capitalizing on the robust growth in the cloud market and is also seeing strong demand for its subscription-based office software. These are long-term secular trends happening in the technology sector, so investors should feel comfortable owning the stock if the economy gets shaky.
Microsoft posted another quarter of double-digit revenue and earnings growth in the most recent quarter. Two of the main drivers of growth are the Azure cloud business, up 62% year over year last quarter, and the growth in Office 365 subscriptions. Subscriptions underpin Microsoft's core office software business, which should provide stability to revenue during a recession.
Furthermore, the dominance of Microsoft's software has translated to a fortress-like balance sheet. It ended the December quarter with $134 billion in cash and short-term investments, which is twice the amount of debt. Investors should also feel reassured that Microsoft has steadily increased its dividend payout over the last 15 years.
CEO Satya Nadella stated on the earnings call that the defining secular growth trend over the next decade "will be the increasing rate of digitization of people, places and things." He noted that technology spending is expected to double as a percentage of GDP over that time.
Obviously, these trends speak to why Microsoft is a stock that investors should be confident to hold in their brokerage accounts even if a recession occurs in the near future.