3 smart stocks to buy if a recession is coming
Will there be a recession in 2023? Many experts think so. But that doesn’t mean great investment opportunities can’t be found.
We asked three members of the Motley Fool to identify smart stocks to buy if a recession is really looming. That’s why they chose Gilead Sciences (GOLD -0.73%), Johnson and Johnson (JNJ -0.47%)and Vertex Pharmaceuticals (VRTX 0.62%).
Great combination for investors
David Jagielski (Gilead of Science): Investors can minimize their risk in the event of a recession by investing in businesses that provide basic products and services and also pay dividends to help offset the decline if stock prices fall. Gilead Sciences meets both of these criteria because HIV treatment is vital for patients. The company is also increasing sales of oncological drugs.
When Gilead last reported earnings in October, its HIV treatment product revenue was up 7% year-over-year to just under $4.5 billion for the period ending September 30, 2022. Oncology revenue of $578 million also grew by an impressive 79%. Gilead sees strong demand for its anti-cancer drug Trodelvy.
The company also raised its forecast, now expecting its EPS to be between $3.35 and $3.55 for all of 2022, up from its previous range of $2.90 to $3.30. Gilead’s earnings would have been even higher if the company hadn’t incurred $448 million in ongoing R&D spending in the most recent quarter. However, these expenses are non-recurring and primarily related to MiroBio’s recent acquisition.
This is an important context to note as investors may be concerned about Gilead’s dividend as the payout ratio appears to be unsustainable at 110%. But without these one-time costs, this ratio would be much lower. Gilead pays out only 41% of the free cash flow received in the last four quarters in the form of dividends. The stock’s dividend yield of 3.4% remains safe today. Gilead may also increase its dividend soon.
Overall, Gilead should be a solid investment whether you’re buying it for safety this year or planning to keep it long term as the business continues to grow.
This company is built to survive any crisis.
Prosper Jr. Buckini (Johnson & Johnson): In times of economic downturn, consumers tend to cut spending, which leads to lower revenues and business revenues. To survive or thrive during a recession, a company must be financially sound or offer products that people cannot do without. Both of these criteria apply to Johnson & Johnson.
The company develops and markets life-saving drugs in several therapeutic areas, from oncology to immunology and neuroscience. Johnson & Johnson is also a leading manufacturer of medical devices, and the products it sells through its Medical Technology division are invaluable to healthcare providers and clinicians. Doctors won’t stop prescribing drugs during a recession, and that’s the last thing patients want to skimp on.
In addition, Johnson & Johnson has a stable income and profit. Even if its financial results suffer somewhat during the economic downturn, the company can handle its short-term liabilities. Johnson & Johnson boasts an AAA credit rating from Standard & Poor’s, which is the highest rating available. Investors won’t see Johnson & Johnson default on any of its debt anytime soon.
Here’s another reason to buy a company’s stock in the event of a coming recession: dividends. As dividend king, Johnson & Johnson has increased its payout for an impressive 60 straight years. Dividends can help offset investor losses if the market drops during a recession, and in the long run, they will make a significant contribution to overall returns for those who choose to reinvest dividends.
Johnson & Johnson’s stable dividend profile, combined with its excellent financial position, could help it weather the next recession and deliver consistent earnings long after.
Keith Spates (Vertex Pharmaceuticals): Unlike Gilead and Johnson & Johnson, Vertex Pharmaceuticals does not pay dividends. However, I think these biotech stocks are a great choice to ride out a recession if one is on the way.
Importantly, Vertex shares have performed well over the past 12 months as investors worried about the economy. Its shares are up more than 30%. I think the good times will continue.
Vertex is practically a money machine thanks to its monopoly on the treatment of the underlying cause of cystic fibrosis (CF). The company is likely to report 2022 revenue of $8.9 billion in its next quarterly report in February. You can expect about 38% of this amount to go to net income.
This CF franchise will almost certainly lead to even more Vertex sales in 2023. But there may be better news in the future. The company and its partner, CRISPR therapyhope to receive regulatory approval for the use of exa-cel for the treatment of sickle cell anemia and beta thalassemia later this year. If approved, exa-cel will be the first CRISPR gene-editing therapy on the market. Vertex believes the drug has a multi-billion dollar potential.
Another late stage program may enter the market in the near future. Vertex is very optimistic about the prospects for its non-opioid acute pain drug VX-548. Once again, the company sees huge market opportunities in the billions of dollars.
Vertex-approved drugs will be in steady demand no matter what happens to the economy. Positive news on exa-cel and VX-548 could be a reliable catalyst for biotech stocks. I think Vertex stock is recession proof and can be bought and held for years to come.