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3 Stocks to Buy if You're Worried About The Recession

By David Jagielski – Jun 21, 2020 at 7:49AM

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They're all performing well amid the coronavirus pandemic and should protect your portfolio while the U.S. economy is in a serious downturn.

The coronavirus pandemic has sent the U.S. economy into a deep recession, which began in February. In March, a broad market plunge sent many stocks into free fall, but the markets have since recovered.

With the threat of a second wave of COVID-19 cases around the corner and many states lifting lockdowns despite spikes in new cases, investors are bracing for another plunge. However, some stocks are much more vulnerable than others. Below are three stocks you can hold in your portfolio that should help provide some stability in this recession and hedge against any future downturns.

A storm and a sign that reads: Economic Uncertainty Ahead

Image source: Getty Images.

1. CareTrust

CareTrust REIT (CTRE 2.77%) is a real estate investment trust (REIT) that holds a portfolio of healthcare-related properties. The bulk of CareTrust's properties are skilled nursing facilities (e.g., nursing homes that offer short-term care), which make up 72% of the REIT's portfolio. Assisted living facilities and independent living facilities account for another 19%, with campuses for senior nursing facilities and assisted living facilities making up the remaining 9%.

CareTrust is an excellent stock to hold during a recession because it's a necessity. The demand for senior healthcare facilities won't waver if the economy's in good shape or not. And with more than 200 properties across the U.S., CareTrust offers investors some great diversification.

There are two great reasons to hold REITs. Due to the nature of their business, which involves collecting rent on a recurring basis, their income is recurring; investors don't have to worry about the company constantly going out and finding sales. By their nature, REITs offer a great degree of stability. REITs also have to pay out at least 90% of their taxable income to shareholders as dividends. Currently, CareTrust pays a quarterly dividend of $0.25. Today, that provides investors with an annual yield of about 5.2% -- well above the 2% investors can typically expect from the average S&P 500 stock. The company has also increased its dividend this year from $0.225 to $0.25.

Overall, CareTrust is a stable buy, and in eight of its last nine quarterly results, its operating margins have come in at more than 50%. When the company released its first-quarter results on May 7, the San Clemente, California-based business saw its revenue rise 12% from the prior-year period, from $39.7 million to $44.3 million. Its net income of $19.3 million was also a 20.4% improvement from a year ago when it recorded a net profit of $16.1 million.

Although it's not immune to the effects of COVID-19, thus far, CareTrust's financials haven't seen a material impact from the pandemic.

2. Netflix

Netflix (NFLX 9.29%) continues to prove its resiliency time and again. When the company released its first-quarter results on April 21, the streaming company reported a healthy increase in subscribers. Global net subscriber additions totaled 15.8 million during the quarter -- well above the 8.2 million additions analysts expected.

People have flocked to the streaming service as they've been locked down amid the pandemic. During a recession, Netflix could also be a popular option for people who haven't ditched cable yet and are looking to keep their entertainment costs down.

The company has proven that even amid new competition from Walt Disney's (DIS 3.70%) Disney+ service, which launched last November, its content is still in strong demand.

The only reason not to buy shares of the Los Gatos, California-based business right now would be that its valuation is high -- at a price-to-earnings multiple of more than 80 and a price-to-book ratio of 22. The tech stock is trading near its 52-week high and investors may want to wait out a dip in price before buying it. However, it's another example of a stock that could survive and even grow during a recession.

3. NextEra

NextEra Energy (NEE 1.59%) is an energy producer, the world's largest when it comes to renewable energy from wind and solar. The stock is a great buy for green investors as well as those who just want stability. The Juno Beach, Florida-based business prides itself on being sustainable and focused on renewable energy. 

Utility stocks are popular picks to hold during a recession because, like REITs, they generate recurring income and can provide a great deal of stability. 

In the company's first-quarter results released on April 22, NextEra continued to show strong numbers. Its operating revenue of $4.6 billion grew 13% from $4.1 billion in the prior-year period. Higher interest expenses weighed down the company's bottom line but NextEra still posted a net income of $421 million. A year ago, the company recorded a net profit of $680 million.

NextEra has consistently posted a profit in each of its last 10 quarters. Its profit margin of 9% this past quarter was only the second time in the past two years that its margins weren't well above 10%. With solid fundamentals, the company's in an excellent position to withstand any adversity from the coronavirus pandemic. 

Investors can also count on the stock for a great payout. Currently, NextEra pays a quarterly dividend of $1.4, up from $1.25 a year ago. It has increased its dividends on a regular basis and is a Dividend Aristocrat, offering investors a stable long-term dividend to add to their portfolios. Today, the stock's dividend yield is 2.2%.

Which stock is the best buy today?

Let's first take a quick look at how each of these three stocks has done against the S&P 500:

NFLX Chart

NFLX data by YCharts.

Netflix has blown away the other stocks on this list, but its high valuation doesn't make now an ideal time to buy.

CareTrust and NextEra are more modest buys, but I'd give the REIT the edge today, if only because it's paying a better dividend, and that can be crucial at a time when stock returns may be underwhelming. However, holding any of the three stocks listed here could be a good option during the current recession.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends NextEra Energy and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$245.20 (9.29%) $20.84
NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
$82.37 (1.59%) $1.29
CareTrust REIT, Inc. Stock Quote
CareTrust REIT, Inc.
$18.21 (2.77%) $0.49
The Walt Disney Company Stock Quote
The Walt Disney Company
$99.40 (3.70%) $3.55

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

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