Wall Street is becoming increasingly concerned about a recession. According to Goldman Sachs CEO David Solomon, there is “probably a 30% chance of a recession as you look forward to the next 12 to 24 months.” 

We are also starting to see a slowdown in the housing market with new home sales dropping by 16.6% which was worse than expected. The ISM New Orders Index has also weakened from above 60 at the start of the year to 53.5 in April. There is also weakness developing in cyclical stocks such as trucking, consumer discretionary, and big-box retailers as investors are increasingly concerned about growth.

Even in a recession, investors can find pockets of outperformance with the right strategies. For investors who believe that a recession is likely, here are 3 stocks to consider buying: Johnson & Johnson (JNJ), EZCORP (EZPW), and Dollar Tree (DLTR). 

Johnson & Johnson (JNJ)

JNJ is one of the world’s leading healthcare companies. It operates through 3 divisions: pharmaceuticals, medical devices, and consumer products divisions with approximately 250 subsidiaries. This gives investors broad exposure to the healthcare industry and sufficient diversification to withstand issues at any one unit. It also has one of the largest research and development budgets in the pharmaceutical industry and is aggressive with M&A.

This is also what makes the stock an ideal selection for more adverse economic conditions. Healthcare revenues are disconnected from economic growth which means that it’s a place of safety for investors while the rest of the market sees increasing volatility. Additionally, its massive balance sheet and dividend payments become more enticing in this scenario.

On the operations side, JNJ continues to perform well. This year, the stock is expected to earn $9.80 per share which is expected to slowly increase to $10.24 and $10.93 per share over the next 2 years. Its valuation is also compelling with a forward P/E of 16.7 and a 2.5% dividend yield. The company also has nearly $35 billion in cash for acquisitions or buybacks.

In terms of the POWR Ratings, JNJ is rated an A which translates to a Strong Buy. This is due to its consistent track record of growth, successful drug development, and strong balance sheet. In terms of component grades, JNJ stands out with an A for Stability and a B for Quality. Click here to see more of JNJ’s POWR Ratings.   

EZCORP (EZPW)

EZPW owns and operates pawn shops in the United States and Latin America. It offers loans collateralized by possessions or property and also sells pre-owned merchandise. As of September 2021, the company had 516 stores in the US, 508 in Mexico, and 124 in Guatemala, El Salvador, and Honduras. 

This is the type of business that does well when consumers are feeling more financial pressure which is certainly the case with rising inflation that is being exacerbated by a potential growth scare for the economy. And, inflation is most hurtful for the type of consumer who makes up EZPW’s customer base as it’s concentrated in food, energy, and rents that is offsetting any wage gains.

The company’s fortunes did take a hit during the pandemic but revenues are now above pre-pandemic levels. Further, the company was able to use this period to trim costs and operating margins. Wall Street analysts are forecasting that this will lead to 61% earnings growth in 2022, while revenues are expected to rise 16%.

Despite these growth expectations, the stock is quite cheap with a forward P/E of 8.9 which is almost half of the S&P 500. With such a strong growth and value profile, it’s not surprising that EZPW is rated a B which translates to a Buy. B-rated stocks have posted an average annual performance of 20.1% which compares favorably to the S&P 500’s annual performance of 8.0%. Click here to see more of EZPW’s POWR Ratings.

Dollar Tree (DLTR)

DLTR is headquartered in Chesapeake, VA, and was founded over 60 years ago as a variety store in Norfolk, Virginia. Today, the company operates about 15,500 stores in the US and Canada with nearly 200,000 employees. In addition to Dollar Tree, it also owns Family Dollar which it purchased for $8.5 billion. 

Dollar stores have experienced incredible growth over the last couple of decades in part due to their low-cost, no-frills offerings which attract bargain-hunting and budget-conscious customers. As a result, DLTR continues to aggressively expand. Last year, it added 600 new stores and expects to add a similar amount this year. 

Macroeconomic factors have also been supportive as retailers catering to the middle-class have struggled while those focusing on the higher or lower-end have thrived. Of course, the recent combination of inflation, coupled with an economy potentially rolling over, could lead to an increase in revenue for DLTR.

So, it’s not surprising that analysts are forecasting 38% EPS growth and 6% revenue growth this year. Despite this growth potential and favorable macro environment, the stock remains reasonably priced with a forward P/E of 15.0 which is cheaper than the S&P 500. 

In terms of the POWR Ratings, DLTR is rated a B which equates to a Buy. It’s part of the A-rated Grocery/Big Box Retailers which is the 2nd best industry group according to the POWR Ratings. DLTR also has a B for Growth due to expectations for continued earnings growth, unlike many companies who are forecasting a drop in earnings. Click here to see DLTR’s full POWR Ratings.

JNJ shares were trading at $179.54 per share on Tuesday afternoon, down $1.55 (-0.86%). Year-to-date, JNJ has gained 6.30%, versus a -12.81% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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