3 Indispensable Recession-Proof Stocks You'll Be Glad You Own

Concern about the U.S. economy has many investors wondering: Is a recession is on the horizon? According to a National Association of Business Economics survey, 28 of 48 economists predict the U.S. will enter a recession sometime this year. News of widespread layoffs and cost-cutting measures at several major companies has added fuel to the fire, and a slowing economy could be on the horizon.

While no one can predict when a recession might happen, you can add certain stocks that could be more durable than others. Three companies that can show resilience in a harsh economic climate are Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%), Progressive (PGR -0.85%), and Costco (COST 0.17%).

1. Berkshire Hathaway

When it comes to well-run businesses, Berkshire Hathaway sits at the top of the list. While many investors are aware of Chief Executive Officer Warren Buffett's investing prowess, there is part of Berkshire that has had an outsized impact: its insurance businesses.

Berkshire Hathaway owns numerous companies, publicly and privately. Some of its largest private holdings include insurance companies GEICO, General Re, Berkshire Hathaway Reinsurance, and National Indemnity. Last year it closed an $11.6 billion deal to acquire Allegheny, which offers property and casualty, specialty, and reinsurance.

For Buffett, insurance is a very large chunk of Berkshire's value. Specifically, Buffett likes insurers because their products "will never be obsolete, and sales volume will generally increase, along with both economic growth and inflation." 

This never-ending demand for insurance makes the businesses a strong source of cash flows, which Berkshire can then pile into investments when it sees opportunities. The cash flows it collects from insurance premiums are called "float," and it's money that Berkshire can put into profitable investments before it has to pay out some of it in claims.

Since it first acquired National Indemnity in 1967, Berkshire Hathaway's float has grown from $19 million to $164 billion in 2022 -- representing an annual growth rate of 18%. As a result, Berkshire has no problem sitting on a pile of cash for years until it finds the right opportunities -- which tend to come during economic downturns. At the end of last year, Berkshire had more than $125 billion in cash and short-term, liquid investments.  

Its strong cash flows and ability to take advantage of market sell-offs is why Berkshire is a solid investment to ride out any recession and hold for the long haul.

2. Progressive

Progressive writes insurance policies on automotive and property insurance. I like Progressive for the same reasons I like Berkshire Hathaway: It operates in an industry with steady demand and can grow with the economy or inflation.

It also helps that Progressive is one of the best at writing profitable policies. It even earned the praise of Berkshire Hathaway Executive Vice Chairman Charles Munger, who said, "In the nature of things, every once in a while, somebody is a little better at something than we are."

So what exactly makes Progressive stand out?

Progressive crushes other insurers when it comes to consistently writing profitable policies. To illustrate this, you must understand a key metric insurers use: the combined ratio. This ratio takes the combined losses and expenses that go into writing insurance policies and divides it by the total premiums collected. A ratio of less than 100% means an insurer is profitable, and the lower, the better.

Since 2002, Progressive's combined ratio has averaged 91.6% and it has never exceeded 96%. The rest of the industry has averaged a combined ratio of 100% over that same period.

Last year, insurance companies' average combined ratio was 102.7% as they struggled to adapt to rising prices for repairs or replacements. Progressive's combined ratio was a solid 95.8% -- above its historical average but still below the industry average. 

Progressive is the top dog when it comes to writing profitable policies. Not only that, but in the past three recessions, Progressive stock has outperformed the S&P 500 -- proving to be an excellent stock to buy and hold for the long haul.

3. Costco

When consumers feel the pinch of a recession, they seek cheaper alternatives, and bulk warehouses are one place they turn. Costco operates a membership-only warehouse that can deliver big cost savings to consumers looking to tighten their belts.

Costco negotiates with vendors and operates on paper-thin margins to get its customers the lowest prices. More consumers are turning to Costco in the current inflationary environment, and it shows. In the fiscal second quarter ended Feb. 12, Costco reported revenue growth of 7.2% and diluted earnings-per-share growth of 8%. 

It has shown resilience, and during the Great Recession in 2009, its net sales fell just 1.5%, its only down year in 21 years. Costco's membership model is incredibly successful, and its business should show resilience in a recession -- making it another solid stock to buy and hold long term.