New spikes in the number of coronavirus cases in parts of the UK, US, and China make a quick economic recovery increasingly unlikely. A prolonged recession or fears of one could crash the FTSE 100 and other UK markets. In uncertain times like this, it makes sense to look for stocks that will do well in a prolonged recession. I think Tesco (LSE:TSCO), Halma (LSE:HLMA), and FRP Advisory Group (LSE:FRP) have the potential to outperform if the markets turn bearish and could help recession-proof a portfolio.
We all need to eat
Food retailers tend to outperform when the economy sours. Essentials, like food, are the last things to be cut as budgets get squeezed. I could have picked a utility company as heat and light are also essential goods. However, when times are tough utility bills may go unpaid, but a food shop is paid for before it leaves the store.
I looked at the four FTSE 100 food retailers back in May of this year. After comparing them across a broad range of profitability, return, credit, and growth measures, Tesco came out on top. The consensus recommendation was 73% in favour of buying Tesco, so an investor won’t be going against the grain when buying.
Health and safety play
Halma produces safety products and services for industrial and healthcare sector companies. Fire detection and suppression systems, for example, are things that business cannot easily cut back on. That is good for the company and its shareholders when a recession strikes.
Dividend payouts to Halma shareholders have steadily increased over time. Although the dividend yield is low at 0.7%, it does look safe. Halma did not have to make use of the government’s corporate financing facility, although it was eligible, and its balance sheet looks strong. It was quick to redirect manufacturing towards things that were in demand as the Covid-19 crisis hit. Acting decisively and quickly preserved Halma’s financial health.
Overall, Halma is a well-run and agile FTSE 100 company with a diverse base of businesses operating in critical areas with a safe-looking dividend. It also looks like a good bet for helping recession-proof a portfolio.
A recession business
Sadly, the coronavirus crisis has forced companies close or into bankruptcy. A prolonged recession will deal more damage. FRP Advisory Group is an AIM-listed company and one of the largest restructuring advisory firms in the UK. FRP had increased its revenues increased from £17.4m in 2011 to £54.3m in 2019. At the same time, revenue per partner increased from £0.6m to £1.09m, so FRP was becoming more efficient even as it expanded.
The coronavirus crisis has increased the number of cases FRP is working on dramatically. In March and April of this year, FRP booked 20% of its 2019 revenues. In May, FRP was appointed as administrators to a couple of high profile department store and restaurant names. A prolonged recession will mean more work for FRP, and it could be a counter-cyclical stock that outperforms when the markets turn bearish.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma and Tesco. 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.