Recession Resistant Stocks? Skip Apple Inc. (AAPL) And GoPro Inc (GPRO), Buy McDonald’s: MS
Apple has been a Wall Street darling for years, although the stock skidded to a virtual halt last year and continues to do poorly. The iPhone maker’s shares may not recover any time soon either, as Morgan Stanley analysts suggest that if a recession really is on tap, they aren’t a good asset to own.
Also in the “bad” column during a recession they list GoPro, Ford, Sprint and others, while the stocks on their good side for a recession include fast food giant McDonald’s and big box discounter Wal-Mart.
Are we heading into a recession?
There’s a great debate raging about whether a recession is near, so in light of that, Morgan Stanley analysts have published two lists: one of stocks they think investors should own if the U.S. is plunged into a recession, and one of stocks they think should be avoided. They note that it’s only been a few weeks since the U.S. Federal Reserve dipped its toe into the water, so to speak, and raised interest rates. The firm’s MSRISK proprietary risk recession model suggests that while the risk of recession is on the rise, it’s still “far below the threshold for signaling approaching recession.”
However, Morgan Stanley’s U.S. Economics team has worked one into its base case with a 20% likelihood that one occurs. Economist Ellen Zentner thinks the economy’s Industrial segment has already entered recession and notes that some service-side indicators are starting to see their growth slow.
And then there are other factors that the markets are taking into consideration. For example, Morgan Stanley’s Chief Cross-Asset Strategist, Andrew Sheets, said that a number of key metrics, including BBB and high-yield bond spreads, equity volatility and the S&P 500’s Schiller P/E are all at levels that have historically been observed in recessions.
“Safe” stocks in a recession
Morgan Stanley analysts have come up with 19 stocks they think would be relatively good to own during a recession and 18 they think should be avoided. They like McDonald’s and Wal-Mart because both cater to the low ends of their respective markets. McDonald’s emphasizes value and is seeing momentum build because of its all-day breakfast promotion, while Wal-Mart could see significant growth because if consumer confidence wanes, Morgan Stanley analysts think middle-income shoppers might “trade down” to the big box retailer.
Other names they like in a recession include H&R Block, because they have found U.S. tax filings to be “relatively resilient in recessionary times” and believe the Affordable Care Act presents a tailwind to the company’s revenues. Also on the list: Acceleron Pharma; Amgen; Centene; Chubb; Church & Dwight; Comcast; Crown Castle; CVS Health; Danaher; First Republic Bank; Hanesbrands; Kraft Heinz; Kroger; Perrigo; PG&E; and Verisk Analytics.
GoPro Inc, Apple Inc – Avoid these stocks in a recession
At the top of the list of stocks they think investors should shun is Apple, and you probably guessed why. Its luxury brand put it at the opposite end of the spectrum from the likes of McDonald’s and Wal-Mart, and Morgan Stanley analysts believe consumers might delay making major purchases. Further, they say the iPhone maker’s large amounts of capital expenditures and research and development costs might “magnify negative EPS leverage if revenue growth slows.”
Another notable name on the “bad” list is GoPro, although most investors and analysts are avoiding it anyway, and the reason has nothing to do with a recession. Looking at it through the lens of a potential recession though, Morgan Stanley suggests that the tumbling sell-in could worsen and reduce further any possible opportunities to fill inventory channels in the company’s upcoming product cycles.
Other stocks they don’t like include Ford, because it is heavily dependent on the U.S., and Time, because of the cyclical nature of magazines and the fact that they’re easy to cancel and save money during a recession. Also on the list: American Airlines; Ashford Hospitality; Autodesk; Bloomin’ Brands; Coach; Community Health; Hill-Rom; Navistar International; Outfront Media; Rockwell Automation; Santander Consumer USA; Spring; U.S. Steel; and Whiting Petroleum.