If you want to find recession-proof stocks, look no further than the companies doing well amid the coronavirus pandemic. If a company can weather the global economic shutdown and uncertainty caused by the pandemic, it can survive a recession.
Here are three companies proving resilient in the midst of the pandemic. All are capable of doing the same in a recession.
Finding a recession-resistant company starts with the strength of its offerings. Because Microsoft (NASDAQ:MSFT) delivers compelling products to both business-to-business (B2B) and consumer markets, the tech giant is well-positioned to weather an economic downturn.
Microsoft's Windows and Office products are ubiquitous, but that's just one of its strengths. The rise of cloud computing created recession-proof revenue streams for Microsoft because its cloud services and products are now the IT backbone for many businesses.
Its cloud division propelled Microsoft to 15% year-over-year revenue growth in the company's third quarter (which ended March 31). Its Azure cloud computing solution led all divisions with a 59% year-over-year revenue jump, followed by 47% growth in Dynamics 365, the company's cloud-based customer-relationship management platform for businesses. In its earnings report, Microsoft stated that "COVID-19 had minimal net impact" on company revenue.
The company has also transitioned many of its products to a software-as-a-service subscription model. This delivers recurring revenue, providing a steady income stream even during a recession.
But that's not all. Microsoft's Xbox saw a 2% year-over-year revenue increase in the third quarter. Its next-generation platform arrives this fall and will launch a new gaming cycle that should add years of revenue growth as customers upgrade.
While many retailers suffered sales declines as economies began shutting down in February and March, Costco (NASDAQ:COST) experienced sales increases. Its position as a retailer of consumer staples powered that growth, as the well-publicized toilet paper buying frenzy exemplifies. But other factors strengthen Costco's position in an economic downturn.
Its membership model provides a loyal customer base as well as an additional revenue stream. Membership renewals stood at over 88% worldwide in its second quarter ended Feb. 16. Costco's membership retention proved strong during the Great Recession and actually grew, proving that its membership model is recession-resistant.
Costco also built up its e-commerce capabilities. It acquired its own logistics company, Innovel Solutions, to support the delivery of furniture and other bulky items.
E-commerce sales accelerated as the pandemic's impact deepened. In its sales report for April, Costco showed a 1.8% year-over-year revenue dip as government restrictions led to reduced in-store traffic and even some mandatory store closures, but its e-commerce division exploded to 85.7% year-over-year growth.
Comparable Sales Growth
|April 2020||$11.4 billion||(1.8%)||85.7%|
|March 2020||$15.5 billion||11.7%||48.3%|
|February 2020||$12.2 billion||13.8%||22.6%|
|January 2020||$11.6 billion||8%||17.6%|
Costco's resilience in the face of the pandemic illustrates how well-positioned the company is for a recession.
3. Verizon Communications
When a recession hits, most consumers still feel the need to maintain phone and online services. That's one reason Verizon (NYSE:VZ) is a solid recession-proof stock.
Another is how well the company manages its financial health. Even with a 1.6% revenue drop in the first quarter, Verizon amassed $7 billion in cash and equivalents. Contrast that with last year's Q1 cash total of $2.3 billion. It also ended the quarter with $3.6 billion in free cash flow, up over 26% from last year. Verizon quickly reacted to the pandemic's impact and set itself up to weather the storm.
It's not just Verizon's strong cash-generating ability and prudent financial management that make it a worthwhile investment. Because the company adapted quickly to the pandemic, it possesses the funds to continue pushing the rollout of its 5G wireless network. Verizon even raised its capital expenditures by a half-billion dollars to accelerate the rollout and enhance its existing network to support increased demand.
The advent of 5G technology means more devices can connect online with greater speeds, facilitating the Internet of Things (IoT), allowing items from household appliances to cars to become internet-enabled. These technologies create opportunities for Verizon over the next several years, including increased equipment sales and the ability to provide new services such as home internet.
Combine this with the demand for its telecommunications capabilities even during economic downturns, and Verizon can deliver stability to an investment portfolio during uncertain times.
The bottom line
All three companies offer goods and services that are in demand whether economies are booming or not. Even better, all pay dividends.
These companies are proving resilient in the face of the coronavirus pandemic, and therefore are capable of doing the same in a recession, making them worthy additions to your portfolio.