The stock market has been selling off, and there is an increasing chance that the U.S. economy could be headed toward a recession. In fact, the Atlanta Federal Reserve is now predicting that Q1 gross domestic product (GDP) will decline by 2.1% after predicting a more than 2% gain in late February.
Against that backdrop, let's look at two defensive stocks that could outperform the market in a recession.
Walmart
NASDAQ: WMT
Key Data Points
When it comes to buying stocks ahead of a recession, Walmart (WMT +0.99%) has proven to be at the top of the list. During the unusual Covid recession, when consumers were sheltering in place, the stock gained 2% compared to a 25% loss for the S&P 500 index. During the Great Recession back in 2008 to 2009, the stock rose 12%.
When budgets get tight during a recession, more consumers turn to Walmart and its everyday low prices. Meanwhile, the company has transformed itself over the years, becoming the largest grocery store in the country as well as the biggest general merchandise retailer.
The retailer's size and scale give it tremendous buying power, which is a huge advantage during a recession. This allows it to be the price leader at a time when consumers are most concerned about finding value. Meanwhile, the company has already been attracting wealthier customers through its better food product assortment and convenience.
Walmart boasts that 90% of the U.S. population lives within 10 miles of one of its stores. This is helping fuel its Walmart+ memberships, especially among wealthier consumers. For only $98 a year, or $12.95 if paid on a monthly basis, consumers get free same-day delivery as well as other perks, such as free access to video streaming service Paramount+. This also includes free same-day pharmacy delivery with no minimum required.
Image source: Getty Images.
Not surprisingly, upper-income households, which Walmart defines as those making $100,000 or more a year, have been a strong growth driver. The company has consistently credited this demographic as driving most of its gains in the past few quarters. With consumers often trading down during a recession, the company could get an even bigger boost from this group if the economy continues to weaken.
Meanwhile, Walmart is also doing well with its Walmart Connect advertising and online marketplace businesses. With its ads business, the retailer has been able to give brands a unique opportunity by being able to reach consumers both online and in-store. In addition, it has been investing in supply chain automation and delivery efficiency to improve its fulfillment capabilities for third-party merchants on its online marketplace.
All in all, Walmart remains a great stock to own during a recession.
Philip Morris International
NYSE: PM
Key Data Points
Another intriguing stock to own during a recession is tobacco company Philip Morris International (PM +1.40%). The company's traditional cigarette business has held up strong, with modest volume growth and strong pricing power leading to solid revenue growth in this segment. This is helped by smoking being more prevalent in international markets compared to the U.S., where the company does not sell traditional cigarettes.
Meanwhile, the company's smokeless products, highlighted by Zyn and IQOS, have been strong growth drivers. Zyn, a flavored nicotine pouch, has become increasingly popular in the U.S. over the past few years. The company is projecting robust Zyn volume growth of between 34% and 41% this year.
IQOS, a heated tobacco system, has also seen solid volume growth. Meanwhile, the company previously bought back the rights for IQOS in the U.S. It is currently testing it in Austin, Texas, and will look to roll it out more broadly once its newer IQOS ILUMA version receives FDA approval.
Importantly for Philip Morris, both Zyn and IQOS come with much better unit economics than its traditional cigarettes. The company has said that Zyn has a six times greater product contribution level than cigarettes, while IQOS's unit economics are twice as good as combustible cigarettes. In the U.S. IQOS should have even better unit economics, as the company will not be cannibalizing its own customer base.
While consumers can trade down during periods of difficult economic times, the addictive nature of Philip Morris' products makes them recession-resistant. Meanwhile, Zyn and IQOS have helped turn it into a growth stock. A growth stock in a defensive industry is a strong candidate to outperform the market during a recession. Investors also get a nice 3.5% dividend yield as well.
