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Ryan Vanzo
Ryan Vanzo
Articles (163) 

3 Stocks for the Next Recession

How to invest during the next bear market

September 25, 2019 | About:

According to the latest Bank of America Corp. (NYSE:BAC) survey, the risk of a near-term recession is now at a multi-year high.

The bank asked 235 money managers whether the global economy will enter a recession over the next 12 months. Nearly 40% expect a downturn over the next year, the highest level of pessimism since the 2008 financial crisis. It’s still the minority of fund managers, but note that even by mid-2008, most fund managers still didn’t foresee the coming collapse.

recession-risk

Growing bearishness shouldn’t come as a surprise. Legendary investor Seth Klarman (Trades, Portfolio) has already outlined why he’s nervous about 2020. Ray Dalio (Trades, Portfolio) sees many similarities between today and the 1930s. And recently, Stanley Druckenmiller (Trades, Portfolio), one of the best hedge fund managers of all time, started selling stocks.

If you’re worried about the next recession, here are three stocks picks to help you ride out the storm.

Fiverr International Ltd. (NYSE:FVRR)

In a nutshell, Fiverr is a platform that provides freelance labor services. Over the next decade, this should be a booming industry. In the U.S. alone, freelancer income already totals $750 billion. Fiverr thinks that $100 billion of that is capable of being hosted and monetized through its platform. With remote and freelance work continuing to proliferate worldwide, this opportunity set should only grow larger.

Founded in 2010, Fiverr has an early lead in rolling up the market. Revenues are growing at more than 35% per year, and customer retention is ridiculously good. More than half of users are multi-year buyers. Ultimately, Fiverr wants freelance work to be as easy as ordering on Amazon (AMZN), with one-click orders, visible results and a vast array of services for every need.

fiverr-revenue

In a recession, outsourcing work to adaptable and often cheaper freelance teams could actually see a boost. “In terms of market volatility, we feel that our business model is relatively insulated from macroeconomic downturns,” Fiverr CEO Micha Kaufman during the recent second quarter conference call. “One may even think that we can benefit from an economic downturn. We have a very diverse buyer base and low revenue concentration.”

Philip Morris International Inc. (NYSE:PM)

Phillip Morris is a classic defensive stock. Even during the worst economic downturns, smokers continue to smoke. It’s difficult to defend on a moral basis, but the returning customer base keeps financials relatively even during rough markets.

Consider the financial meltdown last decade. In 2008, revenue per share was $12.38 while earnings were $3.31 per share. In 2009, the depth of the crisis, revenue had fallen by less than 1% to $12.84 per share while earnings per share barely dropped to $3.24. Free cash flow per share actually grew during the bear market. There simply isn’t a more defensive stock than Phillip Morris.

pm-eps

To make the story even more compelling, a recent market sell-off has pushed shares into bargain territory. The stock trades at just 13.8 times 2019 earnings even though analysts expect long-term earnings per share growth of roughly 8.5%. The fully covered dividend now yields 6.5%. This seems like the terrific time to buy this recession-proof stock.

Foamix Pharmaceuticals Ltd. (NASDAQ:FOMX)

Foamix doesn’t have a recession-proof business model, but its future will be entirely agnostic of market conditions. As a clinical-stage pharmaceutical company, the share price will live or die based on a Food and Drug Administration ruling that should come by Oct. 22, 2019.

As I wrote in April, “Foamix has multiple milestones that could drive 300% in upside, even using conservative estimates.” In October, Foamix anticipates receiving an approval or rejection decision from the FDA for its minocycline-based foam product that helps alleviate acne. Most analysts anticipate this drug generating at least $200 million in annual sales. Even with a price-sales ratio of 3 (a conservative figure compared to current industry valuations), the stock price could triple based on the decision.

foamix-pipeline

Note that Perceptive Advisors, one of the best-performing hedge funds over the last decade, owns 4,661,824 shares, nearly 9% of the company. This is a swing-for-the-fences stock pick, but it’s completely independent of any near-term recession or economic volatility. It’s a big reason why Seth Klarman (Trades, Portfolio) keeps buying biotech stocks.

Disclosure: No positions.

Read more here:

3 Small-Cap Stock Picks From Seth Klarman

Why Ray Dalio Thinks We’re in the 1930s

Al Gore Loves These 3 Stocks

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About the author:

Ryan Vanzo
Ryan has been covering public equities for more than a decade. He has worked on the investment research teams for several multi-billion dollar hedge funds in San Francisco and New York.

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