GSK
- Price/Fair Value: 0.68
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
GSK stock tops our list of recession stocks, with shares trading 32% below what we think they’re worth. GSK is one of the largest pharmaceutical and vaccine companies worldwide by total sales. Patents, economies of scale, and a powerful distribution network support the drugmaker’s wide moat rating, argues Damien Conover, director of healthcare equity research for Morningstar. Conover believes the market is not only underestimating the company’s strong growth and steady pipeline advancements but is also overly concerned by Zantac litigation, which already has been factored into our fair value estimate of $54.
Roche Holding
- Price/Fair Value: 0.70
- Morningstar Uncertainty Rating: Low
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Roche stock is 30% undervalued, according to our measures. Roche is a biopharmaceutical and diagnostic company that holds the leadership position in both oncology therapeutics and in vitro diagnostics; as a result, the drugmaker earns a wide moat rating, says Morningstar sector strategist Karen Andersen. Although foreign exchange and coronavirus headwinds led to a decline in first-quarter 2023 sales, growth benefited from strong sales of newer products and fading biosimilar headwinds. We assign Roche stock a $57 fair value estimate.
Imperial Brands
- Price/Fair Value: 0.71
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer Defensive
The first tobacco company on our list of top recession stocks, Imperial Brands stock trades 29% below our fair value estimate. One of the world’s largest international tobacco companies, Imperial Brands benefits from tight government regulations that make barriers to entry almost insurmountable, says Morningstar director Philip Gorham. That and brand loyalty support the company’s wide moat. In a recent trading update, management indicated that business is tracking in line with forecasts—and our expectations. We assign Imperial Brands stock a $34 fair value estimate.
Anheuser-Busch InBev
- Price/fair value: 0.72
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer Defensive
Anheuser-Busch InBev stock is a recession stock buy, trading 28% below our fair value estimate. The largest brewer in the world, AB InBev benefits from a significant cost advantage relative to its competitors, which creates meaningful barriers to entry and therefore provides a substantial moat, says Morningstar director Philip Gorham. The company has a history of buying brands with promising growth platforms and then expanding distribution while ruthlessly squeezing costs from the businesses, which contributes to its Morningstar Capital Allocation Rating of Exemplary. We think AB InBev stock is worth $90.
Bayer
- Price/Fair Value: 0.72
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Bayer stock is selling 28% below what we think it’s worth. The German healthcare and agriculture conglomerate has carved out a wide moat largely on the strength of its healthcare group, with key drugs in hemophilia and ophthalmology, as well as a consumer business that includes brands such as Bayer Aspirin and Aleve, says Morningstar director Damien Conover. The acquisition of Monsanto expanded the competitive position in the crop sciences industry—but also increased the firm’s exposure to litigation around potential side effects from glyphosate use. We give the stock a $22.50 fair value.
Estee Lauder
- Price/Fair Value: 0.75
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer Defensive
Estee Lauder stock looks 25% undervalued according to our metrics. The world leader in the global prestige beauty market, Estee Lauder has carved out a wide economic moat thanks to its strong brands, entrenched relationships with retail partners, and cost advantages. Smart—and sizable—investments in omnichannel, marketing, and innovations that have helped the company manage inflation and supply chain disruptions, notes Morningstar senior analyst David Swartz. We think Estee Lauder stock is worth $273.
British American Tobacco
- Price/Fair Value: 0.76
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Consumer Defensive
British American Tobacco stock is cheap, trading 24% below our fair value estimate. One of the two largest listed global tobacco companies, it possesses a strong franchise and cost advantages, which have led to a wide moat rating, says Morningstar director Philip Gorham. Like others in its industry, British American Tobacco is diversifying into next-generation products that are most likely to win share of smokers, including vapes, heated tobacco, and oral pouches. We think British American Tobacco stock is worth $47 per share.
Zimmer Biomet Holdings
- Price/Fair Value: 0.79
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Zimmer Biomet stock looks cheap by our metrics, selling 21% below our fair value estimate. Zimmer manufactures orthopedic reconstructive implants. We award the company a wide moat rating thanks in part to the high switching costs that orthopedic surgeons would face if they transitioned to another company’s instrumentation, says Morningstar senior analyst Debbie Wang. Zimmer experienced robust growth during the first quarter of 2023; we estimate that full-year sales growth will fall near 4.7% after adjusting for foreign exchange headwinds, adds Wang. We think Zimmer Biomet stock is worth $175.
Pfizer
- Price/Fair Value: 0.80
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Pfizer stock appears to be about 20% undervalued according to our metrics. Prescription drugs and vaccines account for the majority of the drugmaker’s sales. A basket of diverse, patent-protected drugs power the company’s strong cash flows, which in turn provide Pfizer with significant competitive advantages in developing new drugs, says Morningstar director Damien Conover. Pfizer’s 1Q 2023 results exceeded our expectations, thanks in part to better-than-expected COVID-19 product sales. We assign this recession stock a fair value estimate of $48.
Medtronic
- Price/Fair Value: 0.80
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Medtronic stock is 20% undervalued. One of the largest medical device companies focused on therapeutic medical devices for chronic diseases, Medtronic (like Zimmer) enjoys high switching costs. Its intellectual property and relationship with physicians also contribute to its wide moat, says Morningstar senior analyst Debbie Wang. The U.S. Food and Drug Administration approved the firm’s next-generation insulin pump, which should positively affect results in fiscal 2024, she adds. We assign Medtronic stock a $112 fair value estimate.
How to Find More Recession Stocks to Buy
Investors who want to expand their search beyond this list of recession stocks can do a few things.
- Review Morningstar’s lists of all consumer defensive sector stocks, healthcare sector stocks, or utilities sector stocks to find ideas to investigate further.
- Create your own screen of recession stocks using the Morningstar Investor screener. You can limit your search to just one or two recession-proof sectors or even drill down to particular industries. You can widen your search beyond wide-moat stocks and dip into narrow-moat stocks, too. And you can also screen on stocks based on other valuation metrics that matter to you, such as price/earnings and free cash flow.
- Consider undervalued stocks from Morningstar’s Best Companies to Own List. The companies on this list don’t all cluster in recession-resistant industries. However, these companies nevertheless offer some certainty in terms of their cash flows and fundamentals—and they’re run by adept management teams. Best of all, their stocks are on sale and may therefore appeal to long-term investors looking for stocks to buy for a diversified portfolio, no matter the economic cycle.
Original Article: https://www.morningstar.com/articles/1106498/10-stocks-for-a-recession
