The COVID-19 pandemic and the stock market crash it caused earlier in 2020 showed the importance of keeping recession-ready stocks in your portfolio. Many companies were not prepared for the tough times, and their stock performance reflected that. While a global pandemic of this magnitude is (hopefully) a once-in-a-lifetime event, it's still a smart idea to look for stocks that can thrive in recessions as well as prosperous economic times.
With that in mind, here are three stocks that are not only ready to get through the next recession relatively unscathed, but that also have tremendous growth potential in the years ahead.
A bank that is the best of both worlds
Banks tend to be a rather cyclical business. Recessions not only lead to lower interest rates (meaning lower profit margins) and shrinking demand for loans, but also typically result in elevated unemployment rates that cause a surge in loan defaults.
Investment banking is a different story. As market volatility increases in a recession, so does trading volume. Equity and debt underwriting and M&A activity tend to be quite strong as well. As a whole, investment banks tend to do better during tough times. Goldman Sachs (GS 0.78%) is mainly focused on investment banking and produced some of its best profits ever during the financial crisis and COVID-19 recessions.
Goldman is also making a push into consumer banking with a calculated, tech-focused approach. With one of the most recognized brands in the financial sector and the cost advantage of having no physical branch network, Goldman's consumer banking growth could translate to even bigger profits in years to come.
Perhaps my favorite recession-ready stock is Realty Income (O -0.04%), a real estate investment trust (REIT) that mainly invests in freestanding retail properties. While much of the retail sector is the exact opposite of recession-ready, Realty Income's business is.
Specifically, most of Realty Income's tenants operate businesses that sell essential products, sell services, or sell items at steep discounts -- all of which tend to be rather recession-resistant. Dollar stores, convenience marts, and warehouse clubs are some of Realty Income's top tenant types.
What's more, with more than 6,500 properties in its portfolio, Realty Income's risk from the success or failure of any single tenant is minimal. The company has handily beaten the S&P 500 since its 1994 NYSE listing and pays a 4.7% dividend yield. It has increased its dividend more than 100 times over its roughly quarter-century as an NYSE-listed REIT.
A recession-resistant tech stock?
The COVID-19 recession was atypical, especially for tech stocks. Tech companies generally thrived in the stay-at-home economy. In most recessions, when consumer and business spending falls, tech stocks can be rather cyclical.
Apple (AAPL 1.01%) is a big exception, especially given the recent growth in its service businesses, which mostly produce predictable, recurring, high-margin revenue streams for the company. In the most recent quarter, Apple's services revenue grew by 16% year over year and could still have tremendous room to expand.
Adding to the resilience of Apple's business is its massive $192 billion cash hoard, which gives it financial flexibility to get through even the worst recessions and even to capitalize on opportunities that arise when the economy sours.
To be perfectly clear, with a $2 trillion market cap, Apple isn't the right place to invest if you want stocks that can multiply your money several times over. If you want a stock that can produce good returns with limited downside risk, though, Apple could be a great fit.
These businesses are recession-resistant
As a final thought, it's important to point out that I'm saying these businesses are recession-resistant and should do just fine no matter what the economy does. Their stock prices, however, can still be rather volatile. In March, Goldman Sachs and Realty Income both plummeted by more than 50% from pre-pandemic levels until the market came to its senses. These are great long-term stocks to own in any economy, but don't expect their trajectory to be straight up.