Don’t fear the recession. I’d buy these defensive stocks to come out on top

Paul Summers takes a closer look at two counter-cyclical stocks that look very likely to thrive as the recession takes hold.

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The stock market may have rebounded strongly from March’s coronavirus-related crash, but finding anyone bullish on the UK economy right now is quite a task. Even chancellor Rishi Sunak now believes a significant recession is likely.

Is there any way for Foolish investors to come out on top? I think so. Today, I’m taking a closer look at two companies that could offer great protection from the looming fallout.

Recession-proof

Small-cap Begbies Traynor (LSE: BEG) is a company I’ve been positive on for quite some time. The £140m-cap is a property services consultant and insolvency specialist — the latter a service that, sadly, looks likely to experience greater demand as the recession hits. Indeed, today’s trading update was indicative of what’s likely to come.

Revenue for the financial year to the end of April is now expected to be around £70m — up from just over £60m in 2018/19.

Profits at its business recovery and financial advisory division were a highlight. They grew roughly 30% over the year as more firms faced insolvency, even before the pandemic struck. Recent acquisitions and higher average fee levels also provided a boost.

All told, adjusted pre-tax profit is likely to come in at £9.2m, up from £7m in 2019. The firm did say, however, this included a £600,000 hit after several of its property service lines were hit by the lockdown. 

Positive outlook

Begbies was trading 3% lower this morning, suggesting some traders were banking profits. The stock was, after all, up a stonking 77% since 23 March.

Today’s move aside, I still think the company could be a rare winner in the recession. While the full impact of the coronavirus is unknown, Begbies is expecting “progressive increases in the number of insolvencies” as we move through 2020. This could be compounded, of course, by Brexit.

In addition to this ‘positive’ outlook, Begbies finances look increasingly sound. Net debt stood at £2.8m at the end of April, down significantly from £6m in 2019. The firm had £7.2m in cash last month and undrawn borrowing facilities of £15m.

There’s good news for income seekers too. Having already paid its interim dividend this month, Begbies said it was intending to confirm a final dividend in July. 

Trading on 16 times forecast earnings before markets opened, the stock isn’t screamingly cheap. It could, however, be a great counter-cyclical, recession-beating pick.

Profits “ahead of expectations”

Begbies isn’t the only option for investors in this space. New-stock-on-the-block FRP Advisory (LSE: FRP) could be a great alternative. Larger than its peer Begbies, the company also supports businesses facing insolvency. 

Unsurprisingly, demand for its services has been just as good. In its recent update, FRP said it had “traded strongly” in the second half of its financial year. Revenue will likely to come in at £31.8m with profits “ahead of the Board’s expectations.” For the full 12 months, £63.2m of revenue has been predicted — a rise of 16.4% on the previous 12 months. 

Like Begbies, FRP looks financially sound (and you would hope so!). Like Begbies, the company also expects to pay a final dividend. 

Having only listed in March, the minnow looks to be flying under analyst radars. I expect this to change markedly in the coming months as the recession takes hold. I think those buying this defensive stock now could see great returns in time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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