While the economy appears to be doing well as we recover from the COVID-19 pandemic, there is still the possibility that the country will experience another recession. The most likely catalyst for another recession would be a return of the pandemic which forces a new wave of lockdowns.
Should another recession strike, here are three stocks that should outperform the market. Two are income stocks and one is growth stocks.
Real estate income (NYSE: O)
Realty Income is one of the few real estate investment trusts (REITs) to have increased profits and dividends during the COVID-19 pandemic. Realty Income’s business model is simply more resilient than that of most retail-oriented REITs, in that it focuses on quality (in other words very stable) tenants who are in essential businesses – think pharmacies, shipping companies, and dollar stores. .
If we are forced to re-close non-core stores, Realty Income will be less affected than most shopping center REITs, which typically focus on department stores and consumer discretionary retailers. Realty Income was not completely immune from COVID – some of its tenants were affected, especially its theater and fitness clients. But Realty Income is also a dividend aristocrat, part of an elite group of companies that have increased their dividends for at least 25 consecutive years.
Realty Income is trading at 21 times funds from 2020 Adjusted Operations (AFFO), which is at the high end of its historical range. The stock also has a 3.9% dividend yield. Historically, Realty Income has traded with a dividend yield of between 3.5% and 5%. The stock trades on the rich side based on dividend yield, but given the company’s history of increasing dividends, it might not stay rich for long. While Realty Income is generally considered an income security, it is also a good defensive security.
Duke Energy is a utility, which means it has a highly recession-resistant business model. Duke serves the Southeast and Midwest, providing regulated electricity and natural gas services. Regulated utilities are generally granted monopolies in exchange for accepting price controls. Each state has a public service commission that is responsible for representing the consumer (i.e. the taxpayer). State regulators basically tell the company how much it is allowed to charge its consumers.
State regulators can negotiate hard, but they have an interest in a utility covering its costs and providing adequate services. Since demand for electricity is relatively insensitive to the economy, utilities are often a go-to industry when the economy appears to be weakening. Duke is trading at 20 times the estimated earnings per share for 2021 – towards the lower end of its historic range of 15 to 30 times earnings – and has a dividend yield of 3.9%. Like Realty Income, Duke is an income stock that is also good defensive play.
American Tower (NYSE: AMT)
American Tower is a mobile phone tower REIT that takes advantage of the growing demand for mobile data. The company’s biggest customers are AT&T, T Mobile, and Verizon, which represent 89% of its combined turnover. These companies lease space on the American Tower transmission towers. Like Realty Income, American Tower enjoys a very stable customer base.
American Tower is isolated from the ebb and flow of the economy due to consumers’ voracious appetites for mobile data. On the company’s first quarter earnings conference call, he said the average smartphone user consumes 15 gigabits per month, and he expects that number to grow to 50 gigabits per month by 2026. , which corresponds to a cumulative average growth rate of 27%.
While most investors see American Tower as a growth stock (which makes sense), it also rewards its shareholders with income. The company has increased its dividend quarterly since April 2012. The company expects the 2021 AFFO per share to rise to $ 9.50 per share, giving the share a multiple of 31 times the AFFO per share. Again, this is at the top of its historical range. The dividend yield is 1.8%, which is low for a REIT, but you get 12% annual AFFO growth per share and a history of longer term growth. Historically, American Tower has traded with a dividend yield of between 1.4% and 2.25%, so the stock is in the middle of its range.
American Tower and Realty Income are both trading at the high end of their historical valuation ranges. This is typical when the stock market is trading at record highs; every potential investment in stocks will seem expensive compared to historical multiples.
Keep in mind that these stocks have resilient business models that will perform well even in times of recession. If the economy goes into recession, expect their price-to-earnings ratios to drop, but the companies themselves should hold out despite the economy. Investors can’t really escape the global multiple squeeze without trying to time the market, which is usually a losing proposition.
Duke Energy and Realty Income are good income stocks that will hold up reasonably well if we get another COVID outbreak or the economy weakens significantly. Think of them as income stocks that are doubled as defensive. American Tower is a growth stock, and revenue is expected to continue to grow as the mobile data market grows.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.