Suddenly, investors are looking for companies that can survive a possible recession. Corporations with high profitability and low debt seem a pretty good bet.
Most corporate chief executives, in a recent Wall Street Journal poll, said that a recession has either already begun or will begin in the next 12 to 18 months. I put the odds at about 40% this year and 60% next year.
Here are five stocks that I believe have the financial and operational strength to come through a recession in good shape. Each has achieved a return on capital of 17% or better in the past year, and has debt equal to 10% of stockholders’ equity or less.
Moderna’s revenue was a mere $60 million in 2019. In the past four quarters, it was more than 300 times larger, $22.6 billion. Many traders figure that, as the Covid pandemic eventually wanes, so will Moderna’s revenue. That’s why the stock trades at the paltry multiple of four times earnings.
I would bet the other way. The company’s executives think its messenger RNA technology can be applicable to additional diseases. The upside is huge if they are right.
Based in North Reading, Massachusetts, Teradyne has averaged 12% annual revenue growth for the past decade. It has shown a profit in 12 of the past 15 years. Its return on invested capital was more than 52% last year and 34% last quarter.
It’s natural for investors to worry about feast-and-famine cycles in the semiconductor industry. The industry has seen plenty of those. But right now there is a worldwide shortage of semiconductors, so I expect Teradyne’s profits to stay strong.
I recommended Logitech International SA (LOGI, Financial) a year ago and it did terribly. But the Swiss maker of computer peripherals (keyboards, mice, webcams and the like) has a superb record of profitability.
Its return on invested capital has been above 17% in 11 of the past 15 years. I consider anything above 10% good. Had you owned Logitech stock for the past decade, you would have almost quintupled your money.
When I recommended it a year ago, the stock was on the expensive side. But today it goes for less than 15 times recent earnings. A recession could dent sales for a while. But with no debt on its balance sheet, I think Logitech would hold up well.
Americans have steadily increased their consumption of chicken. In 1985 it passed pork in popularity, and in 1992 it passed beef.
Sanderson Farms Inc. (SAFM, Financial), based in Laurel, Mississippi, is the nation’s third-largest chicken producer, with close to a 10% market share. Last year, it agreed to be acquired by a joint venture of Cargill and Continental Grain for $203 a share.
That merger is on hold while the U.S. Department of Justice investigates it. Meanwhile, the stock has moved up to $208.
Assuming Sanderson stays independent, I think it’s a good investment. Debt is only 1% of equity. The stock trades for only five times earnings.
Mueller, based in Memphis, Tennessee, was founded in 1917 and has been profitable for at least 30 years in a row (as far back as my database goes). That includes the Great Recession of 2008-09.
This is the 18th column I’ve written about stocks with high profitability and low debt.
My picks from a year ago did the worst of all 17 previous years, down 39%. The poorest performers were Turtle Beach Corp. (HEAR, Financial), down 59%, and Logitech International, down 58%. Also in the red were Sturm Ruger & Co. (RGR, Financial), down 22%, and Gentex Corp. (GNTX, Financial), which fell 17%.
By comparison, the Standard & Poor’s 500 Total Return Index was down 11.8%.
The long-term picture is better. Of the previous 17 columns, 11 showed a profit and 10 beat the index. The average one-year return on my picks has been 10.8%, versus 9.0% for the index.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].