The best stocks to buy during (and after) recessions are nearing appealing prices. We will cover many businesses and the latest market moves of Warren Buffett to see how you can take advantage of the current situation.
I’d like to share that much of my knowledge comes from reading. I discovered some great books that can help you to become a better investor and to improve your mindset. Please check my overview page where I have summarized these for you: https://www.financeandinvestingfacts.com/best-investing-books/
Time to swing at wonderful businesses
In this blog I’d like to share examples of the best stocks that can make it through recessions. These companies are almost never on sale. Simply put, the best businesses earn a lot of money due to the high returns on capital, have good management and low debt levels.
Note that this article is not investment advice. My goal is to share businesses that I believe are of very high quality and able to perform well over time. These are stocks that I would advise to family and friends. Remember, it’s far better to buy a good business for a decent price than a mediocre business for a cheap price.
The characteristics of the stocks below should sound familiar to the readers of my second article: https://www.financeandinvestingfacts.com/how-warren-buffett-invests-in-stocks/
It will help tremendously if you can combine this with a good understanding of my first article: https://www.financeandinvestingfacts.com/the-investing-principles-of-warren-buffett/
A great time to start accumulating the best stocks
A once in a decade chance to buy Phil Fisher companies (the best of the best) for Benjamin Graham prices! The strike zone for investors is in sight. The picture of this article is of a famous high hitting baseball player named Ted Williams. The key is to hit .333 which means you are able to successful hit a baseball one out of three. Luckily, in investing you don’t have three strikes but you can wait indefinitely for a good pitch! A good pitch in investing means a wonderful business at a good price.
Note that the earnings of many of these companies will decline in value in the short-term. But the nature of the business (i.e. their products and services) and the capital structure (low debt) will make it very likely that these companies will survive a recession.
Conservative investors sleep well
The businesses below align well with the brilliant thoughts of Phil Fisher’s book. Fisher states that conservative investing means making sure you maintain your purchasing power. You do this by buying excellent companies that are superior in: Production, Marketing, Research, Financial Skills and People Relations. I highly recommend this book (as does Warren Buffett).
Top-10 of best stocks
Top-10 companies below include a short summary of why I believe these companies are so good. This comes down to the reason that we can be very sure that the companies can earn adequate cash and have very decent returns on capital with low debt levels.
Please compare the businesses with earlier articles that I’ve written to see if you recognize the best business characteristics. Most companies are US companies. I prefer US companies often because they earn on average higher returns on their investments. Additionally, these companies have a large world wide exposure.
1. Berkshire Hathaway
This is my favorite business created by Warren Buffett. Magnificent management with high integrity and a unique holding company with numerous high quality businesses. Berkshire Hathaway is a financial fortress well capable of weathering the current market situations and potential recessions.
The company’s four main parts of operation are insurance (e.g. Geico), non-insurance businesses like Duracell and See’s Candy. Thirdly, their investments in e.g. Apple and Coca-Cola and finally the large amount of cash available for additional investment opportunities.
Berkshire Hathaway at prices well below $200 is an interesting and conservative stock with very low risk of losing purchasing power over time. I also recommend to read the letters of Warren Buffett or to buy the book the Essays of Warren Buffett which summarize the main points.
2. Johnson & Johnson
This company is a worldwide healthcare provider since 1887 and a Dow Jones 30 company. It operates in three segments: Consumer, Pharmaceutical, and Medical Devices.
JNJ is a very conservative investment due to the products and services. The pipeline of medicines looks promising (please check JNJ’s annual report). Additionally, the company has a long track record of positive free cash flow and dividends. Furthermore, Warren Buffett owned shares of JNJ but sold because he needed the money for other investments.
Merck, Pfizer, Roche and Novartis are other good options to consider for research in the health space. Note that JNJ has the largest market capitalization.
The Dutch British Conglomerate serves more than 2 billion consumers in more than 160 countries. Unilever is organized in Food & Refreshments, Home Care and Beauty and Personal Care.
Unilever has a large portfolio of powerful brands like Dove and Ben & Jerry’s. Note that Unilever has a quite high pay-out ratio of dividends compared to earnings and is buying back stocks. So the high return on capital is mainly due to previous investments and not all earnings can be invested against a return of 20% anymore. This is the case for many of the companies described in this article.
Still, it’s a very safe and stable conglomerate that would serve dividend orientated investors well over time. Unilever has also outperformed the Dutch stock-exchange over longer periods (AEX) due to its increasing earnings over time.
4. Proctor and Gamble
P&G is the American Unilever with its own strong brands like Head & Shoulders and Gillette. Also a very stable company with a long dividend record that should have little problem to surviving a crisis. We’re quite addicted to many of their products and use these daily.
The slide from one of the latest shareholders presentations shows the impressive track-record of P&G. Also, Warren Buffett owned shares of P&G but sold because he needed the money for other investments.
A wide portfolio ensures enough income to prevent sleepless nights for the investor. The only thing you need to do is not overpaying for such a company.
World famous brand known for its sparkling soft drinks, water, juice and coffee and tea. It is the largest nonalcoholic beverage company according to the annual report of Coca-Cola. The moat is the brand recognition worldwide and the good memories that most people have when thinking about Coca-Cola.
The company’s stock price is declining sharply due to worries about distribution and the fact that restaurants can sell less of their products currently. However, I’m not seeing Coca-Cola disappear any time soon! They have enough growth ahead and will continue to earn enough money to make it a very safe investment for the right price.
Another famous consumer staples company that offers consumers well known brands like Pepsi and Quaker. Pepsico increased its dividend for 47 years and is likely to be able to keep on paying dividends even under severe economic circumstances.
This company has earned billions of cash over the years with very decent returns on capital.
Kimberly-Clark Corporation makes personal care, consumer tissue, and professional products worldwide. Their soap can be found for example all over the world in hospitals.
People worldwide are using their products in large quantities. Likely, KMB sees an increase in sales due to the current virus situation.
8. Google (Alphabet)
Marketing is the important factor that allows companies to communicate their service to their consumers. Alphabet has plenty of growth opportunities in cloud, health and autonomic driving for example. Although ads account for most of the revenue currently. It’s search engine Google, Android and the success of Youtube give the company a big moat.
The advertising revenues are declining temporarily due to the current crisis which puts short-term pressure on the stock. Google has a very strong balance sheet with over $110 billion in cash and practically no debt. Ample cash will give Google the advantage to buy-out other companies.
People are probably going to postpone the buying of Apple products which decreases revenues. The brand and products and services is so strong that long-term chances of continued business success is huge.
Amazon is a fabulous business with a brilliant CEO and businessman, Jeff Bezos. Bezos has a focus on free cash flow (link) and understands very well how to generate shareholder’s wealth. Just read Bezos’s 1997 letter and this quote that says it all to me:
When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flowsJeff Bezos
Amazon is performing even in these harder economic times due to increased demand for their online business. Berkshire Hathaway has a stake in the company (around one billion dollars, purchased by one of the younger investment managers of Warren Buffett).
Other examples of excellent companies
Other good company examples are for example Clorox, Costco, Visa, MasterCard, ASML, Facebook, Alibaba, Microsoft, JP Morgan and Nestle. Health, consumer goods and utilities are most likely to survive recessions. You can add technology to these sectors (Google and Amazon for example).
These are companies with good future prospects that have a good balance sheet and can generate huge piles of cash. All companies above are above to generate money due to the high rates on their investments. Their size and low debt means increase safety due to lower chances of losing money over time.
Clorox is one of the companies that is profiting from the crisis due to its cleaning products.
Details of some other best stocks
Visa, Mastercard and Microsoft are among the companies that have the best track record due to their outstanding compounding capabilities over years. These companies could very well be in the top-10 of many investors due to their strong moat! Visa and Mastercard are known for their trusted network for payments.
Berkshire Hathaway has stakes in Mastercard, Visa and American Express (another credit card company). Note that American Express is also holding the money (like a bank) while Visa and Mastercard are not. The question for the future is how long the businesses are able to keep on reinvesting their earnings at high returns on investment.
How to take advantage of this information
I believe that an investor who buys a few of these stocks (5-10) at decent prices will do very well over time. My advice would be to write down the businesses and to start doing research. Read the annual report and check the financials over the last 5 years.
Questions to ask about a business
What is the business doing (how do they and will they earn money)? Is there a franchise which is a moat (competitive advantage) that protects the business? Who are the managers? What does te industry look like? How much debt do they have? Do they earn money? Are the margins better than the competition? These are just some questions that can be relevant when researching stocks.
Furthermore, ask yourself what you would be willing to pay for such a business and compare that to the current price of the stock. Strike (i.e. buy) when the price of the stock is well below the value of the business! Ensure that the criteria of Warren Buffett are on your list and that you know how to value a business.
Concentrate your money in the best stocks
Build a portfolio gradually over time with 5-10 of these businesses by buying a few times at favorable prices. The best portfolio management then is to do nothing for months or years and to just let the businesses grow their earnings.
Your portfolio will increase in value as well over the years as your businesses earn more money. Don’t get distracted by daily (or yearly) swings in the stock price. Only add to your positions when they are on sale.
Warren Buffett is buying more stocks
Update (April 4, 2020): Buffett sold stocks in Delta and Southwest: https://www.cnbc.com/2020/04/03/warren-buffetts-berkshire-hathaway-sells-part-of-delta-southwest-airline-stakes.html. We have to wait until May to find out actually what Buffett bought and sold when the 13F SEC fillings will be released.
It is encouraging to see that Warren Buffett keeps on buying stocks. I’ve reviewed the latest SEC information of Berkshire and found two additional purchases. In the previous recession article, I mentioned that Buffett bought shares of Delta Airlines (which dropped significantly since that purchase).
Buffett buys some additional Davita shares as disclosed in the SEC form 4. This form 4 tracks changes in the amount of shares for large (10%) owners. Note that we don’t know the reason and that the position is relatively small.
Also, we see that he bought additional Bank of New York Mellon shares as he filled a SEC form 3. A form 3 filling is necessary because Berkshire’s stake increased to over 10%.
The most important thing before you buy stocks
Your attitude and behavior towards investing is the most important factor for long-term investment success. The investors who keep it together and are true long-term investors in great businesses will be very prosperous in 5 to 10 years is my believe. Although, I am unable to guarantee results, I do believe that buying top businesses for low prices maximizes the chances for investment success.
Please do your own research to make sure that you believe in the company and are able to weather through tough markets! This will only happen if you start looking at the investment relations pages of the companies and if you allocate time for research. Dollar cost averaging into the market (S&P 500 ETF) is also a good idea for the long-run.
Mr. Market and your behavior
The toilet paper buying is a perfect example of human behavior that shows how we can panic and focus only on the short-run. Selling stocks for cash is also an example of this. We basically are uncertain and are looking at others for guidance. Don’t let Mr. Market be your guide! Use Mr. Market to buy businesses for the long-run for good prices. And then hit your perfect pitch like Ted Williams!
Lastly, make sure that you keep ample cash to cover your expenses at all times. This means that you are unlikely to be in the situation of selling your stocks in a down market. The current situation is very uncertain and further decreasing stock prices are very likely. Be prepared for this situation!
Best of luck and wisdom to all! Hope this information was valuable to you. Read books to train yourself and become more familiarized with investing.
The stock market is a device for transferring money from the impatient to the patient .Warren Buffett