Are we on the cusp of a recession? Several key indicators are flashing red, and if history is any guide, trouble could be brewing for the U.S. economy in 2025. You’ve probably heard about the inverted yield curve, which has been a reliable recession predictor in the past. When long-term interest rates fall below short-term rates, it’s often a sign that investors are pessimistic about the near-term economic outlook. And they often begin looking for stocks with potential to for weather the forecast recession.
The Sahm Rule recession indicator is another one to watch. It signals the start of a recession when the 3-month moving average of the unemployment rate rises 0.5 percentage points or more relative to its low in the previous 12 months. This indicator has never triggered a false alarm outside of a recession since the 1970s.
Speaking of unemployment, it tends to rise rapidly heading into a recession but falls slowly during the recovery. We saw this pattern play out in the 2007-2009 recession. And while unemployment didn’t follow the usual script in 2020 due to the unique nature of the pandemic, it’s an important metric to monitor.
Even the Oracle of Omaha himself, Warren Buffett, has been selling stocks for seven straight quarters. When Buffett starts playing defense, it’s worth taking notice. The recent carry trade rout in the markets is another warning sign.
I’m not saying you should panic and exit the market entirely. However, it may be prudent to take some profits on high-flying tech names and cyclical stocks. Instead, consider rotating into defensive sectors and recession-resistant stocks. Here are seven to look into:
McDonald’s (MCD)
You probably don’t need an explanation about what McDonald’s (NYSE:MCD) does. Its stock has struggled a little recently, but I still believe McDonald’s is a stock you need to buy before the potential 2025 recession hits. Why? Just look at how this company has performed in past downturns. In 2008, while the rest of the market tanked, McDonald’s stock actually went up, and so did its financials. Fast forward to the 2020 COVID shock that devastated the restaurant industry. McDonald’s proved its resilience yet again, with drive-thrus and digital orders making up for lost dine-in sales.
Its franchised restaurants count has also been increasing non-stop for the past few years.
People simply gravitate toward cheap, comforting, fast food when times get tough. McDonald’s gets this, so they recently launched a new $5 value meal deal to lure back cash-strapped customers. While some analysts have downgraded the stock, the consensus still rates MCD a “Moderate Buy” with an average price target of $302. The stock also comes with a 2.46% dividend yield.
Church & Dwight (CHD)
Church & Dwight (NYSE:CHD) manufactures and markets a range of household, personal care and specialty products. The company recently reported strong Q2 2024 results, with organic sales growth of 4.7% driven by successful new product launches like Arm & Hammer Deep Clean detergent and Batiste dry shampoos. Despite some signs of consumer weakness, Church & Dwight has been one of the most stable and consistent compounders over the past few decades. I don’t believe any recession can throw this company off track.
Church & Dwight sells very sticky consumer staples products, and the recent pullback to around $100 per share puts the valuation at a reasonable level. Sure, some will point to the stock trading at 30 times forward earnings, but I wouldn’t lose sleep over it. This company has a history of recovering quickly from downturns, and blue-chip names like CHD often command a premium for their safety. The 1.1% dividend yield provides a nice sweetener as well.
Autozone (AZO)
I believe AutoZone (NYSE:AZO) has been one of the best compounders over the past few decades, thanks to the booming auto repair industry. This trend should continue, and the company is well-positioned to weather a recession relatively unscathed. In tough economic times, people are more likely to repair their existing vehicles rather than upgrade to new ones. The biggest tailwind for AutoZone is the aging U.S. vehicle fleet. The average passenger car is now 12.6 years old, a record high. A recession could actually boost demand for AutoZone’s products and services.
In their latest quarterly report, AutoZone posted impressive results, with earnings per share of $36.69, beating estimates by 44 cents, though revenue of $4.24 billion slightly missed expectations. The company is progressing on strategic initiatives like expanding its mega hub store network to improve parts availability and delivery speed. AutoZone’s stock has recently outperformed the broader retail sector, rising nearly 10% over the past month. Autozone has also been one of the most shareholder-friendly companies in the past decade due to its aggressive buybacks.
Of course, no company is recession-proof, and AutoZone would likely see some slowdown in a severe downturn. Rising interest rates could pressure consumer spending. However, most analysts remain bullish. AutoZone deserves a spot in your portfolio if you’re looking for a resilient retailer that can thrive in good times and bad.
Berkshire Hathaway (BRK-A, BRK-B)
Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) is a holding company with diverse businesses under its umbrella. The conglomerate has been making headlines lately as Warren Buffett continues his selling spree.
In Q2 2024 alone, Buffett offloaded over $75 billion (net) in equities, including nearly half of Berkshire’s massive Apple (NASDAQ:AAPL) stake. This has ballooned Berkshire’s cash pile to a record $276.9 billion.
While some may view this defensive move as concerning, I believe the Oracle of Omaha is wisely preparing for the potential storm ahead. Sure, Berkshire isn’t immune to market downturns. Its stock took a hit in 2008, just like the broader market. But this time around, Buffett seems to have learned from past mistakes. He’s been a net seller of stocks for seven straight quarters, opting instead to stockpile Treasury bills. Berkshire now owns more than the Fed!
I view the stock as more of a rebound play. Once valuations become attractive again, you can bet Buffett will swoop in and scoop up bargains to ride the next rally. In the meantime, Berkshire’s operating earnings remain robust, jumping 15% in Q2 thanks to strength in its wholly-owned businesses like auto insurer GEICO.
Flowers Foods (FLO)
Flowers Foods (NYSE:FLO) bakes and markets packaged bakery foods in the United States. The company has faced some challenges recently, with its stock price declining 8.4% over the past year and trading about 24% below its all-time high.
I used to consider Flowers Foods one of the most consistent and stable companies in the stock market. Its performance has been very impressive since the stock has been one of the most reliable in its size range. I can’t think of any company that trades with a market capitalization of around $5 billion that has been this steady.
However, I said “used to,” since Flowers Foods has broken the trajectory it was on for over 20 years. The stock is now up just 2% in the past five years. Despite these headwinds, I still think it’s a good buy at this range. The company has already faced significant pressure, and a lot of bearishness seems priced in right now.
In its most recent quarter, Flowers Foods grew sales 2.8% year-over-year to $1.58 billion, though its net income increased a more modest 3.3% to $73 million. Analysts expect the company to earn $1.25 per share in fiscal 2024, putting the stock at a reasonable 18 times forward earnings.
I believe Flowers Foods can weather a potential recession well given the inelastic demand for its products. As it recovers, you can sit back and collect the stock’s hefty 4.2% dividend yield. While the road may be bumpy in the near term, for long-term investors, Flowers Foods looks like a solid buy-and-hold at these levels.
Coca-Cola (KO)
Does Coca-Cola (NYSE:KO) even need an introduction? It’s one of the world’s most recognizable brands, with an unrivaled global supply network that governments have tapped for emergencies. I believe the drink is unlikely to become irrelevant anytime soon and should sell just as well during a recession. Even if sales dip, you’ll be well-compensated over time with KO’s attractive 2.8% dividend yield. The stock has impressed, rising nearly 15% year-to-date despite the tech rout dragging down markets.
Despite facing some challenges like calls for boycotts in certain regions and a massive unresolved $16 billion tax dispute, Coca-Cola reported solid second-quarter 2024 results, with 15% organic revenue growth and 7% comparable EPS growth. The company even raised its full-year 2024 guidance on the back of this momentum. This organic revenue growth has been very impressive in the post-COVID era.
KO stock looks fairly valued after earnings. All in all, Coca-Cola remains a resilient blue-chip staple to consider for a defensive 2025 recession portfolio.
Procter & Gamble (PG)
Procter & Gamble (NYSE:PG) is a consumer goods giant that produces household essentials like Tide laundry detergent, Charmin toilet paper and Gillette razors. In Q4 2024, P&G reported solid results with 4% organic sales growth, 12% core EPS growth and strong cash flow. The company has delivered consistent mid-single digit organic growth over the past several years through its integrated strategy focused on superiority, productivity and an agile organization.
Now, I know P&G is a cliché pick for any list of recession-resistant stocks, but that’s only because it’s so obvious. Let’s be real, consumers will not stop buying Tide pods or Crest toothpaste just because the economy hits a rough patch. P&G’s products are sticky and generate reliable revenue streams.
That said, don’t expect P&G shares to be completely immune if a recession strikes. The stock has declined significantly in past downturns, and I wouldn’t be shocked to see it correct again. But if you’re investing for the long haul, you really can’t go wrong owning P&G. A few years from now, you’ll be glad you bought it, even if there are some short-term bumps. Plus, you can collect that sweet 2.36% dividend yield while you ride out any volatility.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
