You might not like what I’m about to say, but history suggests the U.S. economy is in big trouble.
Based on three recession-probability indicators, which examine the Treasury yield curve inversion, new industrial orders, and an assortment of leading economic indicators, you can all but pencil in a recession at some point in the not-too-distant future. Collectively, these recession-forecasting tools haven’t been wrong in more than a half century.
If you’re wanting someone or something to point the finger at for the growing likelihood of a U.S. recession, look no further than the nation’s central bank. In hindsight, the Federal Reserve stuck with historically low lending rates for too long and overleveraged its balance sheet, which is packed with long-term Treasury bonds and mortgage-backed securities. Unwinding this mess has the potential to break something in the U.S. economy and/or Wall Street.
However, a recession would be no reason for long-term investors to retreat to the sidelines. Some of the best deals on innovative, game-changing businesses can be found during the short periods of investing panic that often accompany an economic downturn.
Here are three genius stocks to buy if Fed monetary policy induces a recession.
Your eyes are not deceiving you. The first smart stock to buy if a Fed-induced recession were to materialize is a cyclical financial stock: Mastercard (MA).
As you can imagine, a company that relies on consumers and businesses to increase their spending is liable to be hurt, at least temporarily, by a spending slowdown during a recession. However, recessions since the end of World War II have lasted only 2 to 18 months. Comparatively, economic expansions draw out for multiple years. Mastercard is a direct beneficiary of the natural expansion of the U.S. and global economies.
Additionally, Mastercard is poised to benefit from a reversal in the U.S. personal saving rate. Though the personal saving rate of 4.7% in January 2023 was higher than the 2.7% registered this past June, it’s still hovering around a 15-year low. When consumers have less money saved, they tend to turn to plastic. Fewer cash transactions would be a positive for Mastercard.
Investors should be aware that Mastercard has the coveted No. 2 position in credit card network purchase volume locked down in the United States. Though it trails rival Visa by nearly 29 percentage points, having almost 24% of U.S. credit card purchase volume to itself is a significant long-term growth driver.
What’s more, Mastercard, like Visa, has entirely avoided becoming a lender. While this means giving up interest income and fee potential during periods of expansion, it also allows Mastercard to avoid the direct pain that loan losses cause during a recession. Not having to set aside loan-loss provisions means Mastercard has no capital constraints during a recession or in the period when a new bull market is forming. In short, it’s going to bounce back more quickly from a downturn than many of its peers.
A second genius stock to buy if the nation’s central bank sends the U.S. economy spiraling into a recession is robotic-assisted surgical systems developer Intuitive Surgical (ISRG).
One of the best things about healthcare stocks is that they tend to be quite defensive. No matter how poorly the U.S. economy performs, people will still become ill and require medical care. This fact is what helps most healthcare companies generate predictable operating cash flow every year.
The one catch for Intuitive Surgical is that the COVID-19 pandemic has pushed some optional procedures into future quarters. However, with updated COVID-19 vaccines available and natural immunity building among the population, these delays aren’t adversely impacting the company’s long-term growth trajectory.
What Intuitive Surgical offers its shareholders is complete dominance of the robotic-assisted surgical space. Over the span of roughly two decades, it’s placed more than 7,500 of its da Vinci surgical systems in hospitals and surgical centers worldwide. This is substantially more than its competition.
A further advantage is that it takes time and money to train surgeons to use the da Vinci system. Once a hospital or surgical center chooses to purchase or lease one of these systems and invests in training, it becomes highly unlikely that it’s going to switch to a competing system. In other words, Intuitive Surgical’s clients tend to stick around for a long time.
But it’s the company’s revenue mix that’s really appealing. During the 2000’s, when the da Vinci surgical system was rolling out, Intuitive generated most of its revenue by selling these pricey but costly to-build systems. Over time, selling instruments with each procedure and servicing these systems have grown into Intuitive’s top sales channels. Instruments and servicing sport much better margins than system sales, which will allow Intuitive Surgical’s profits to outpace its sales growth for the foreseeable future.
Enterprise Products Partners
The third genius stock to buy if the Fed induces a recession with its hawkish monetary policy is energy stock Enterprise Products Partners (EPD).
Some of you might be shuddering at the idea of buying an oil-and-gas stock before or during a recession. That’s because it’s not uncommon for energy commodity prices to decline during a recession as demand wanes. But Enterprise Products Partners isn’t an upstream drilling company. It’s well protected as a midstream operator.
As of February 2023, Enterprise operated more than 50,000 miles of transmission pipeline, could store 260 million barrels of crude oil, natural gas liquids, and refined product, and operated 29 natural gas processing plants. It’s an energy middleman tasked with moving and storing key energy commodities.
The beauty of Enterprise Products Partners’ operating model can be seen in the way its contracts with drilling companies are structured. In 2022, approximately 75% of its gross operating margin derived from fixed-fee contracts. These fixed-fee contracts remove inflation from the equation and ensure steady operating cash flow no matter how volatile the spot prices are for crude oil and natural gas.
Being able to accurately forecast its cash flow each year is what allows Enterprise’s management team to confidently invest in the company’s future. In addition to the occasional acquisition, it has approximately $5.8 billion invested in a dozen major infrastructure projects — all of which are slated to come online before the end of 2025.
Lastly, Enterprise Products Partners offers a rock-solid ultra-high-yield dividend. It’s currently doling out a 7.5% yield, and the company has raised its base annual distribution in each of the past 24 years. At no point during the coronavirus-induced bear market was Enterprise’s payout in any danger of being cut. This makes it an excellent stock to buy for income seekers.
— Sean Williams
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Source: The Motley Fool