Depending on who you talk to, we may or may not be in a recession. The textbook definition of an economic recession is two consecutive quarters of decline in gross domestic product, which we’ve experienced in 2022. However, other economic indicators that often fall during recession—including employment and consumer spending—have trended up so far this year.
Morningstar’s head of U.S. economics Preston Caldwell lands in the no-recession-yet camp, noting: “Recession risk is on the horizon, which is partly why we expect the Federal Reserve to start cutting rates in 2023 in order to prop up the economy.”
Given all the talk of a recession—current or perhaps impending—investors may be thinking about adding some recession-resistant stocks to their portfolios.
What Are Recession-Resistant Stocks?
Recession-resistant stocks are stocks of companies whose products and services consumers will continue to purchase no matter the economic climate. In a slowing economy, consumers will generally still fill their prescriptions, seek medical care, practice good hygiene, and enjoy their favorite beverages and snacks. They’ll also continue to pay for running water, electricity, and gas to heat their homes.
In addition, recession-resilient companies tend to be financially healthy and highly profitable, two qualities that are prized when economic times get tough. Such companies often have competitive advantages that allow them to maintain reliable cash flows over time, regardless of what’s going on in the economy.
How to Find Recession-Resistant Stocks
Stocks that meet this definition of “recession resistant” often share these qualities.
- These stocks land in Morningstar’s defensive Super Sector: This Super Sector includes industries that are relatively immune to economic cycles: healthcare, consumer defensive, and utilities.
- These stocks earn wide Morningstar Economic Moat Ratings: Stocks that have durable competitive advantages, or economic moats, are by their very natures more reliable than no-moat companies in terms of their businesses. Wide-moat companies are financially healthy and highly profitable, two qualities that are prized when economic times get tough.
- These stocks have Low or Medium Morningstar Uncertainty Ratings: The Uncertainty Rating represents the predictability of a company’s future cash flows. As such, we have a pretty high degree of confidence in our fair value estimates of stocks from companies with Low and Medium Uncertainty Ratings.
10 Undervalued Stocks for a Recession
These were the 10 most undervalued stocks as of Aug. 1, 2022, that Morningstar’s analysts cover that fit our definition of recession resistant.
- Anheuser-Busch InBev BUD
- Imperial Brands IMBBY
- Zimmer Biomet Holdings ZBH
- Medtronic MDT
- Gilead Sciences GILD
- Roche Holdings RHHBY
- GSK GSK
- British American Tobacco BTI
- Ambev ABEV
- Veeva Systems VEEV
Here’s a little bit about each of these stocks, along with some key Morningstar metrics.
Anheuser-Busch InBev
- Price/fair value: 0.59
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer defensive
Anheuser-Busch InBev stock is a buy, trading 41% below our fair value estimate. The largest brewer in the world, AB InBev benefits from a significant cost advantage relative to its competitors, which creates meaningful barriers to entry, and therefore provides a substantial competitive advantage, or wide economic moat, says Morningstar director Philip Gorham. We think AB InBev stock is worth US$90.
Imperial Brands
- Price/Fair Value: 0.62
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer defensive
Imperial Brands stock trades 38% below our fair value estimate. One of the world’s largest international tobacco companies, Imperial Brands benefits from tight government regulations that make barriers to entry almost insurmountable, says Morningstar director Philip Gorham. That and brand loyalty support the company’s wide economic moat. We assign Imperial Brands stock a US$36 fair value estimate.
Zimmer Biomet Holdings
- Price/Fair Value: 0.63
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Zimmer Biomet stock looks cheap by our metrics, selling 37% below our fair value estimate. Zimmer manufactures orthopedic reconstructive implants. We award the company a wide economic moat rating thanks in part to the high switching costs orthopedic surgeons would face transitioning to another company’s instrumentation, says Morningstar senior analyst Debbie Wang. We think Zimmer Biomet stock is worth US$175.
Medtronic
- Price/Fair Value: 0.72
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Medtronic stock is 28% undervalued. One of the largest medical device companies focused on therapeutic medical devices for chronic diseases, Medtronic (like Zimmer) enjoys high switching costs. Its intellectual property and relationship with physicians also contribute to its wide moat, says Morningstar senior analyst Debbie Wang. We assign Medtronic stock a US$129 fair value estimate.
Gilead Sciences
- Price/Fair Value: 0.74
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Gilead Sciences stock is selling 26% below what we think its worth. Specializing in therapies to treat life-threatening infectious diseases, the drugmaker has carved out a wide economic moat thanks to its patent-protected HIV regimen and continued dominance in the hepatitis C market, notes Morningstar sector strategist Karen Andersen. We peg the stock with an US$81 fair value.
Roche Holding
- Price/Fair Value: 0.75
- Morningstar Uncertainty Rating: Low
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Roche stock is 25% undervalued, according to our measures. Roche is a biopharmaceutical and diagnostic company that holds the leadership position in both oncology therapeutics and in vitro diagnostics; as a result, the drugmaker earns a wide economic moat rating, says Morningstar sector strategist Karen Andersen. We assign Roche stock a US$55 fair value estimate.
GSK
- Price/Fair Value: 0.77
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
GSK stock looks mispriced, as shares trade 23% below what we think they’re worth. GSK is one of the largest pharmaceutical companies worldwide by total sales. Patents, economies of scale, and a powerful distribution network support the drugmaker’s wide economic moat rating, argues Morningstar sector director Damien Conover. We think GSK stock’s fair value is US$54.
British American Tobacco
- Price/Fair Value: 0.79
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer defensive
British American Tobacco stock is cheap, trading 21% below our fair value estimate. One of the two largest listed global tobacco companies, British American Tobacco possesses a strong franchise and cost advantages, which have led to a wide economic moat rating, says Morningstar director Philip Gorham. We think British American Tobacco stock is worth US$50 per share.
Ambev
- Price/Fair Value: 0.79
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer defensive
Ambev stock appears to be about 21% undervalued according to our metrics. The largest brewer in Latin America by volume and one of the largest beer producers in the world, Ambev enjoys customer loyalty and cost advantages that provide the company with a wide economic moat, says Morningstar director Philip Gorham. We assign Ambev stock a fair value estimate of US$3.50.
Veeva Systems
- Price/Fair Value: 0.82
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Veeva stock trades 18% below our fair value estimate. The leading provider of cloud-based software solutions tailored to the life sciences industry, Veeva enjoys a wide economic moat rating: The time and expense of switching to a competing software solution is high and can come with substantial operating risks, says Morningstar sector director Damien Conover. We think Veeva stock is worth US$275.
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