For investors looking for shares to buy, an economic downturn is both a headwind and an opportunity. A recession can mean lower returns in the short term, but it can also be a chance to make great long-term investments.
According to rating agency Moody’s, both the UK and the US are set to fall into a recession because of higher interest rates. As a result, I’m looking at for opportunities to profit in a potential downturn.
J D Wetherspoon
An obvious way to invest for a recession is to buy shares in businesses that are likely to experience steady demand even in a downturn. Typically, those are consumer staples, utilities, and healthcare companies.
My first stock to buy for a recession is none of these – in fact, it’s the opposite. It’s JD Wetherspoon (LSE:JDW), the UK pub chain.
The risks of investing in a pub company with a recession on the way are obvious. Revenues are likely to fall and exert pressure on a balance sheet that already contains a lot of debt.
It looks to me, though, that the effects of a recession would be more severe for JD Wetherspoon’s competitors than for the company itself. As a result, I think it would find its competitive position strengthened.
To an extent, this happened during the pandemic – Wetherspoon’s emerged from the crisis with a stronger balance sheet and an enhanced competitive position. And I anticipate something similar from a recession.
That’s why JD Wetherspoon is my top UK stock to buy for a recession. While I see a recession being a short-term headwind, I also believe it would set the company up for long-term profitable growth.
Kraft Heinz
When I invest, I aim to follow Sir John Templeton’s advice and look for opportunities abroad as well as at home. That means attempting to take advantage of opportunities beyond the UK.
With the US also facing a possible recession, the stock I’d buy there is more conventional. It’s Kraft Heinz (NASDAQ:KHC), which I think has the capacity to keep making money even in a downturn.
Kraft Heinz has some powerful brands. Anecdotally, I note their products even appear on the shelves of discount retailers, who would much rather sell a different product at a lower price.
Even without brand power, though, the company’s scale allows it to keep its production costs down. This makes it harder for smaller businesses to compete on price and margin.
Inflation is something of a risk for the company – its ability to pass through higher input costs can only go so far. But overall, I take the view that this would be a great stock to own in a recession.
One of the things I believe is often overlooked with this company is its balance sheet. Since 2019, Kraft Heinz has been reducing its debt and I think this will lead to growth in investment returns in the long term.
Shares to buy
Both the UK and the US might be heading for a recession. But as an investor, this brings long-term opportunities as well as short-term risks.
In the UK, I think JD Wetherspoon can withstand a downturn and emerge stronger. Across the Atlantic, I’d back Kraft Heinz’s steady earnings power to outperform.
