While it might be nice to think that this economic expansion is different from all prior ones, the truth is that that's basically never true on Wall Street. Economic activity runs in cycles, and every up has invariably been followed by a down. You need to accept that fact no matter how good, or bad, things are at a given moment.
However, if you embrace these economic cycles, you can start to make some better long-term investing decisions. When the next recession comes along (and it will eventually happen), here are three stocks to consider buying.
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1. Nucor: Buying the best
Nucor (NUE -1.08%) makes steel and is, probably, one of the best-run steel mill operators on the planet. Steel is a highly cyclical industry, given that the metal is so important to the economic growth of so many business sectors. Right now the company's dividend yield, at around 1.7%, is near historic lows, suggesting the stock is richly priced. What's kind of shocking is that the yield is so low despite a recent 23% increase in the dividend payout. The truth is, Nucor is hitting on all cylinders today, posting record results in 2021. It's a great stock, just not a great time to buy the stock.
But those good times won't keep going forever. When the economy, and the demand for steel, cools, there could be an opportunity for investors to pick up this industry-leading name on the cheap. And if you plan now, you can be prepared to act while others are fearful. That's because, while the steel industry is cyclical, Nucor's performance remains consistently strong. Evidence of this can be found in Nucor's ability to generate annual dividend hikes for nearly 50 consecutive years (it's a Dividend Aristocrat) through all sorts of macroeconomic conditions. That streak is supported by an operation that is not just larger, but more diversified than any domestic steel-making peer. And the company has long focused on being a leader in the steel niches it services, and it's the No. 1 or No. 2 company in 12 different steel-making categories. Indeed, buying when this stock is out of favor because of economic weakness is likely to be the best call for long-term investors.
2. Federal Realty: Strong performance through thick and thin
Switching gears, Federal Realty (FRT 0.71%) is a real estate investment trust (REIT) that owns strip malls and mixed-use developments. It has increased its dividend annually for 54 consecutive years, which is the longest streak in the REIT sector. That streak also makes it a Dividend King. The business isn't particularly sexy, but is clearly very reliable. That said, Wall Street is aware of just how good this REIT is, and it is usually priced at a premium. Today the dividend yield is a historically low 3.5%. During the last couple of recessions, however, that yield has spiked up toward 6%. That's when you want to jump in here.
Federal Realty takes a slightly different approach from its peers, focusing on a small portfolio (roughly 100 properties) of very well-located assets. Basically, its retail assets are near large and wealthy population centers. It actively manages its assets, constantly investing in them to increase value over time. And once a property is fully valued, management will sell it and put that money to work on a new project. Given the dividend streak, it's pretty hard to argue with the playbook here. But the best time to buy is still when everyone else is selling.
NUE data by YCharts
3. Eaton: Focused on power
Eaton (ETN 1.90%) suffers from the same full (perhaps over-) valuation as the other two names above. The dividend yield is just 2%, which is historically low and suggests it's being afforded a very generous price. This is not a name that value investors would be interested in today. But the company, which is over 100 years old, is very good at what it does, which is to help other companies effectively manage power. Eaton doesn't have the same dividend streak as Nucor or Federal Realty, but the dividend has generally trended higher over time.
The biggest selling point is that around 70% of sales come from the global electricity sector. The company simply has too many product offerings to list, but the world is clearly shifting from carbon energy sources toward cleaner alternatives. The efficient use of electricity is increasingly important. The rest of the business is tied to aviation, a legacy vehicle operation, and a new division focused on eMobility (basically, electric vehicles). Although Eaton has been working to make its business less cyclical, when the next recession hits, its top and bottom lines will get crimped and investors are likely to sell it. That's when you should consider stepping in and buying this well-positioned industrial name.
Prepare for the "worst"
At the end of the day, Nucor, Federal Realty, and Eaton are three very well-run companies. However, investors are aware of this fact, and the stocks are kind of expensive. But all three are economically sensitive and the next recession is likely to lead to stock price declines. If you take the time to understand how well they are run, however, you can confidently step in and buy them during the rough patches so you get in at cheap prices instead of the dear ones that they trade at today.
