I've got good news and bad news for the investing community.
First, the good news: Over long periods of time, every single crash and correction in the stock market has eventually been wiped away by a bull market rally. If you buy great companies and are patient, you have a very good likelihood of growing your wealth.
Now for that bad news: The winds of change are blowing on the economic front and the possibility of a recession in the U.S. is rising.
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The U.S. may be on the verge of a recession
As much as we'd rather not contend with slowing growth and recessions as both investors and working/retired Americans, they're a natural part of the economic cycle. While there's no concrete indicator for when a recession will occur, there are two data points that are particularly worrisome.
To begin with, the U.S. inflation rate for February tipped the scales at 7.9%. That's the highest reading in 40 years. When the prices for commonly purchased goods and services rises at historically high levels, it leaves the Federal Reserve with few options other than to squash future growth prospects with interest rate hikes. With dwindling access to cheap capital, consumer and corporate spending is likely to decline.
The other telltale warning sign that a recession may be near is the flattening yield curve. The gap between short-term and long-term Treasury bond yields has been shrinking in recent weeks. An inversion of the yield curve (i.e., where short-term bonds have higher yields than long-term Treasuries) has preceded every recession dating back decades. Note, however, that not every inversion is followed by a recession.
If the U.S. does dip into a recession, it doesn't mean investors should run for the hills. After all, most recessions only last for a few months to a couple of quarters. Rather, investors should take the opportunity to go on the offensive and purchase companies that can thrive in virtually any economic environment. Below are three no-brainer stocks to buy if a recession rears its head in the United States.
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NextEra Energy
The first stock begging to be bought if the U.S. dips into recession is electric utility NextEra Energy (NEE 0.54%).
The great thing about utility stocks is they're highly predictable, which isn't a bad thing when economic uncertainty becomes commonplace during a recession. If you own a home or rent, you very likely need electricity to live comfortably. This leads to pretty consistent demand from one year to the next, as well as highly transparent cash flow.
What separates NextEra Energy from its competition, other than its industry-leading market cap, is the company's focus on developing and supporting renewable energy projects. No utility in the country is generating more capacity from solar or wind power; and with $50 billion to $55 billion set aside for capital expenditures between 2020 and 2022, it's unlikely any other electric utilities will come close to dethroning NextEra.
Additionally, the company has benefited from historically low lending rates over the past couple of years. This access to cheap capital, coupled with markedly lower electricity generation costs, has helped propel its compound annual growth rate to the high single digits for more than a decade. For context, most electric utilities grow by a low single-digit percentage on an annual basis.
As one final note, NextEra Energy's traditional utility operations that aren't powered by renewables are regulated. Although this means the company can't just pass along rate hikes anytime it wants, it also ensures it doesn't have to face potentially volatile wholesale electricity pricing. This is another piece of the puzzle that makes NextEra's cash flow very predictable.
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Vertex Pharmaceuticals
Another no-brainer buy if the U.S. dips into recession is specialty biotech stock Vertex Pharmaceuticals (VRTX -1.02%).
Similar to utilities, healthcare stocks are highly defensive and a great investment choice should an economic contraction arise. Since we can't control when we get sick or what ailment(s) we develop, there's always a need for prescription medicines, medical devices, and healthcare services in any economic environment.
What makes Vertex so special is the company's product portfolio that targets cystic fibrosis (CF). CF is a genetic disease characterized by thick mucus production that can obstruct the lungs and/or pancreas. While there's no cure for CF, Vertex has developed four generations of Food and Drug Administration (FDA)-approved therapies for CF patients, and is currently working on its fifth-generation treatment in clinical studies.
In October 2019, Vertex's latest blockbuster CF drug, Trikafta, was given the green light by the FDA five months ahead of its scheduled review date. Because it targets the most-common CF mutation (F508del), Trikafta can be given to roughly 90% of CF patients aged six and older. Trikafta should easily surpass $6 billion in net product sales in 2022.
Vertex is also working on more than a half-dozen therapeutics outside of its CF franchise. This includes CTX001, which is being developed in cooperation with CRISPR Therapeutics as a treatment for severe sickle cell disease and transfusion-dependent thalassemia, and VX-880, which is targeted at type 1 diabetes. Fueling this research is Vertex's huge cash pile, which totaled more than $7.5 billion in cash, cash equivalents, and marketable securities at the end of 2021.
Vertex is wildly profitable, cash-rich, and growing sales by a double-digit percentage, yet it can be scooped up for just 17 times forecast earnings in 2022.
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Mastercard
The third and final no-brainer buy if the U.S. enters a recession is payment processor Mastercard (MA -0.07%).
Unlike NextEra and Vertex, Mastercard is a cyclical company that isn't immune to recessions. This means it performs well when the U.S. and global economy are thriving, and it suffers when recessions cause consumers and businesses to pull back on their spending. The key here, as noted earlier, is that recessions don't last very long. Buying shares of Mastercard allows investors to take advantage of the natural expansion of the U.S. and global economy over time. In other words, patience can pay off handsomely.
Aside from its cyclical ties, Mastercard is in excellent shape with regard to the U.S. and international markets. As of 2018, it was the No. 2 credit card processor by network purchase volume in the United States. That's not a bad place to be when it comes to the leading market for consumption in the world.
Meanwhile, many regions of the world remain underbanked. With most transactions still being conducted in cash, Mastercard has a multidecade opportunity to expand its infrastructure into the Middle East, Africa, and throughout Southeastern Asia.
But perhaps the most important thing of all to recognize is that Mastercard isn't a lender. Although some of its peers do double-dip by processing payments and lending via credit cards, these peers are also exposed to rising loan delinquencies during recessions. Since Mastercard doesn't lend, it isn't required to set capital aside to cover potential loan losses. This is why the company has rebounded so quickly following previous recessions.
