It’s undeniable that many investors fear a recession is on the way, with the ongoing U.S.-China trade war not doing much to quell these concerns. That's despite the two nations agreeing to meet in early October. "[The] base case for the trade war now is no deal before the 2020 US election," Citigroup said in a research note to clients.
Amid an economic landscape littered with uncertainty, key recession indicators are painting a bleak picture.
For starters, since August 14, the yield on the benchmark 10-year Treasury note has dipped below the 2-year yield more than once. Typically, long-term bonds have a higher interest rate than short-term bonds when the market is performing well. When the opposite is true, it means that an inversion of the yield curve has taken place, with this event occurring before the last seven recessions.
It doesn’t help that gross domestic product (GDP) fell from 3% in the first quarter of 2019 to 2% in the following quarter.
With corporate earnings growth and manufacturing growth both declining, investors are now searching for stocks that can survive a potential recession and flaring trade tensions as "implied probabilities of a 2020 recession are now high enough to warrant caution," according to Citigroup.
Bearing all of this in mind, analysts have highlighted a few defensible stocks that make compelling investments when the alarm has been sounded by key recession indicators.
Here are 3 stocks to buy amid flashing recession warning signals.
Lockheed Martin Corporation (LMT)
According to some analysts, the defense and aerospace contractor has the weapons it needs to fight off recession threats. Demand in the defense space is expected to remain steady as there are always conflicts regardless of the state of the market.
Part of Lockheed’s appeal lies in its strength as a dividend stock. It consistently raises its dividend, with the yield at 2% and current annualized payout at $8.80 per share.
“Dividend investing is a defensive investment style that generates regular cash flows for investors and tends to outperform when markets are volatile,” stated UBS global chief investment officer Mark Haefele in a note to clients.
LMT has seen almost two decades of at or above 10% annual boosts, resulting in a decade-long dividend growth of more than 16% on average. With the company raising its full-year diluted EPS guidance from $20.05 to $20.35 to between $20.85 and $21.15 and posting an increase in cash generated from operations on July 23, LMT looks poised to boost its dividend once again.
Adding to the good news, LMT was awarded a $347 million contract from the U.S. Army as part of the multi-year hypersonic weapons development program on August 29. This is on top of the two contracts from the pentagon, worth $32.1 million and $12 million, respectively, it received earlier in August for modifications to F-35 Lightning II Joint Strike Fighter planes.
Based on all of the above factors, Berenberg Bank analyst Andrew Gollan reiterated his Buy rating and $410 price target on July 24. The four-star analyst believes share prices could gain 7% over the next twelve months.
AT&T Inc. (T)
Despite the volatility in the broader market, shares of the telecommunications company are up 15% in the last three months.
While AT&T has faced its fair share of headwinds in its TV segment as well as amassed debt of almost $160 billion, the company has made progress in both of these areas. On August 30, T announced a multi-year agreement with Starz to offer its full content lineup on AT&T’s network. The company has also been consistently paying off its debt.
Most importantly, AT&T stands to become one of the key players in the 5G space thanks to its upcoming network rollout. Once the network is active, it’s expected that the company will be able to improve its pricing power and see the number of devices on its network grow, driving revenue to new heights.
It also doesn’t hurt that AT&T has cemented its status as a top dividend stock with a dividend yield of 5.8% as well as a current annualized payout of $2.04 per share. With an already impressive 35 consecutive years of dividend increases, analysts expect T to continue to reward investors.
All of the above as well as a strong Q2 performance lends itself to Cowen & Co. analyst Colby Synesael’s conclusion that the company is on pace to meet or even exceed its 2019 guidance. As a result, the five-star analyst reiterated his Buy rating while raising the price target from $34 to $40 on July 25. He thinks that shares could surge 13% over the next twelve months.
Wall Street appears to mirror Synesael’s sentiment. 6 Buy ratings vs 2 Holds received in the last three months add up to a ‘Strong Buy’ analyst consensus and a $36 average price target.
Mondelez International (MDLZ)
People always need to eat, with this fact not changing amid a recession. That’s where Mondelez International comes in.
The snack maker already has a vast product pipeline with several well-known names such as Oreo, Cadbury, Philadelphia and Toblerone. That doesn’t mean this consumer staples giant is sitting by idly.
The company plans to raise reinvestment in the second half of the year to around $100 million, up from $50 million in the first half. It will place a majority of the focus on two of its largest brands, Oreo and Cadbury.
MDLZ has made significant efforts to increase efficiency as well as expand its presence online. According to its July 30 Q2 earnings release, the company has invested in fast-growing sales channels such as eCommerce and in high-potential emerging markets. It has also reigniting its Nutter Butter brand in the U.S., which received the gift of double-digit growth when it celebrated its 50-year anniversary during the quarter.
Not to mention the company announced that it is adding protein bars to its product lineup with the acquisition of PerfectSnacks in July.
All of this has attracted the attention of Morgan Stanley’s Dara Mohsenian. “MDLZ stock offers a compelling opportunity given the company’s positive strategy changes, pending reinvestment and favorable geographic and category growth footprint,” he explained. As a result, the four-star analyst gave MDLZ a ratings boost, upgrading it from a Hold to a Buy and keeping the $62 price target on August 8. His price target implies upside potential of 12%.
The rest of the Street is on the same page. MDLZ boasts a ‘Strong Buy’ analyst consensus thanks to 10 Buy ratings vs 3 Holds assigned in the last three months. The $61 average price target suggests upside potential of 10%.