The economic disaster being brought on by the COVID-19 pandemic continues. Initial jobless claims surged to over 6.6 million on a seasonally-adjusted basis in the last week of March, and shelter-in-place orders remain in effect to combat the further spread of the contagion. The S&P 500 front-ran the pain with a 20% decline during the first quarter of 2020, and it's possible the fallout isn't finished yet.
Thus, loading up on recession-ready stocks -- those that will stay strong during economic contraction and rebound quickly once the world starts to mend -- still isn't a bad idea. For the month of April, I'm eyeing Verizon (NYSE:VZ), Microsoft (NASDAQ:MSFT), and Alibaba (NYSE:BABA).
Telecom more important than ever
It goes without saying that the coronavirus outbreak will hurt most businesses, but some industries and companies were better prepared than others to handle it. Verizon could be one of those companies.
Mobile telecom services have matured after a couple of decades of growth driven by increasing mobility and data services. What was once a discretionary item on the chopping block when consumers were in a pinch is turning more into a basic necessity. Besides basic voice and text, the mobile network speeds that come with increasingly popular unlimited data plans are often nearly as fast as the wired internet connections many households have -- thanks in large part to 4G LTE advancements. In this regard, Verizon's network is still top-notch and on average, tops AT&T and T-Mobile.
Verizon itself may also have the added benefit of having a fast enough network that some households may use their data plan as a way to cut costs elsewhere. As early proof of that possibility, CEO Hans Vestberg said in a recent CNBC interview that Verizon's overall web traffic grew 20% week over week in mid-March -- driven by streaming TV and video games. For many, Verizon 4G has enough firepower for their entertainment needs.
The rollout of 5G networks was just getting started in 2019, and Vestberg said that Verizon will increase capital spending by $500 million (for a new range of $17.5 billion to $18.5 billion) to continue its upgrades this year. While Verizon made some missteps by buying media companies AOL and Yahoo! a number of years ago, it has been refocusing on its core telecom business in recent years. By contrast, AT&T shelled out about $85 billion for Time Warner in 2018.
Verizon's net debt is still quite high at $109 billion, but the company is generating plenty of free cash flow (revenue less cash operating and capital expenses) -- even after its additional spending on next-gen network upgrades -- to service the liabilities and cover its dividend, which currently yields 4.5%. It isn't perfect, but America's largest telecom should do well during the crisis.
Cloud computing just got cemented into place
Cash is king, as the saying goes. And no one has more cash right now than tech giants. At the end of December, Microsoft had $134.3 billion in cash, equivalents, and short-term investments, and $69.6 billion in debt -- good for a net cash position of $64.6 billion. That makes the old computing stalwart one of the most cash-rich organizations in the world -- though still trailing the massive $115 billion net cash hoard at Google parent Alphabet.
Either way, Microsoft has ample liquidity to cover its overhead (net cash is equal to a couple of years' worth of operating expenses), make share repurchases, invest in future growth, or do whatever else it can dream up in the coming quarters. Microsoft is in tip-top shape to handle nearly anything that's thrown at it. Besides having deep pockets, the company has been transitioning to cloud-computing services, a migration that helped enable a 14% increase in revenue and 35% increase in operating income during its last reported quarter.
Granted, organizational spending on cloud-computing services could take a hit for a while as the effects of the pandemic are digested. Nevertheless, global spending on the cloud was and is expected to continue growing by double-digit percentages over the long term. It's still early on, but it would seem that all things digital just got a massive shot in the arm due to the outbreak, as households are being forced to stay at home and employers are enacting remote-work policies.
Shares of Microsoft are roughly flat year-to-date, but nearly 20% below the all-time high registered in February. The stock still trades for a premium 29 times trailing-12-month free cash flow, but such is the norm for high-quality businesses. Once the dust settles, Microsoft is likely to be in as strong a position as ever.
E-commerce in China a bridge over troubled waters
For the last recession-ready stock, we travel to China. During the early days of the coronavirus outbreak, e-commerce played an invaluable role in helping contain the spread of the disease. Digital sales were already growing north of 20% a year and accounted for a quarter of all consumer spending in China, numbers that are likely to increase once official figures get released after the coast is clear.
That puts Alibaba in prime position to weather the storm. However, it's worth noting that management didn't provide any guidance for 2020; instead, it reported that results will be a mixed bag, with retail and travel spending down, offset by an increase in grocery and delivery services. Cloud computing, which increased 62% year over year in the final quarter of 2019, should also hold up well.
So why Alibaba stock now? Barring any particularly disastrous change in the outlook -- which seems unlikely, as signs point to China's economy beginning to recover -- Alibaba should do well in a post-coronavirus world. CEO Daniel Zhang mentioned on the last earnings call that e-commerce boomed after the SARS outbreak in the early 2000s. Something similar is shaping up as a result of COVID-19. As China's leader in all things digital, Alibaba deserves investor attention.
Alibaba reported $54.3 billion in cash and equivalents and $17.6 billion of debt at the end of 2019. Already a fast-growing enterprise as China transitions to a consumer-based economy, this tech giant is ready for a global recession.