While the winter holidays generally bring out a festive mood, the waning days of 2022 have instead brought much anxiety. Specifically, macroeconomic dynamics and market pressures point toward an incoming recession in the new year. For those that are committed to staying in the equities sector, a strategy shift may be in order. Therefore, certain downturn-resistant stocks such as McDonald’s (NYSE:MCD) and Colgate-Palmolive (NYSE:CL) offer significant relevance.
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Earlier in December, the benchmark S&P 500 index demonstrated signs of volatility due to recession fears. Later on, energy markets also slipped due to concerns about a global slowdown. With the Federal Reserve committed to tackling skyrocketing inflation by raising the benchmark interest rate, borrowing costs naturally increase. In turn, the challenges associated with borrowing money cause consumers to spend less, resulting in decelerating economic activity.
What has onlookers particularly concerned about the current dynamics in the equities space is that, according to various experts, inflation may have already peaked. If so, the Fed doesn’t necessarily need to step on the gas in terms of its hawkish monetary policy. Instead, it merely needs to maintain course, which should allow inflation to gradually decline. In such a circumstance, the narrative would be positive for all stocks.
Instead, with the central bank’s latest interest rate hike of 50 basis points, policymakers demonstrated that they remain committed to the monetary tightening policy. Not surprisingly, the less-than-ideal ecosystem for growth-oriented companies led to several layoffs.
In a hawkish environment, only a few names will likely enjoy upside success. Below are two stocks to buy to counter a possible recession.
McDonald’s (MCD)
An iconic symbol of American capitalism, McDonald’s fast-food business benefits from both the cheap entertainment thesis along with the trade-down effect. Fundamentally, people need escapism. Back during the Great Depression, the Hollywood industry came to life, allowing hard-hit workers to overcome a horrific economic crisis. In a way, the same can be said about fast food, providing comforting sustenance at a cheap price.
As for the trade-down effect, consumers typically don’t go cold turkey with their discretionary spending. Instead, they trade down to cheaper alternatives of discretionary products and services until they reach an acceptable equilibrium. Frankly, McDonald’s occupies one of the lowest rungs in the dining-out scene as you can get. Thus, MCD makes sense as a candidate for stocks to buy to prep for a recession.
Finally, on the quantitative front, McDonald’s enjoys strong profit margins. Specifically, investors should tune into the company’s gross margin of 56.13%. For starters, this stat ranks better than 66% of enterprises in the restaurant industry. More importantly, though, it gives McDonald’s flexibility in terms of pricing power. Essentially, the company can adjust pricing to focus more on volume or higher product-unit profitability with a smaller impact relative to a low gross-margin enterprise.
Is MCD Stock a Buy?
Turning to Wall Street, MCD stock has a Strong Buy consensus rating based on 17 Buys, three Holds, and zero Sells assigned in the past three months. The average MCD price target is $285.70, implying 6.78% upside potential.
Colgate-Palmolive (CL)
Best known for its namesake brand of toothpaste, Colgate-Palmolive may well represent the perfect example of inelastic demand. By the book, inelastic demand refers to consistent, predictable revenue influxes irrespective of underlying product or service price changes. During an economic downturn, such an attribute commands significant importance, making CL one of the stocks to buy.
Specifically, dentists recommend their patients brush their teeth three times a day. Should the price of toothpaste rise, households will likely make the necessary sacrifices to keep their dental health intact. If prices fall, that by itself won’t necessarily lead to people brushing their teeth four or five times a day.
Further, Colgate-Palmolive may benefit from hard-hit consumers looking to stretch their personal care dollars. During the worst of the COVID-19 pandemic, people avoided the dentist’s office for both health and financial reasons. Now, it may all be about the financials. Still, from the perspective of CL stakeholders, demand will still come in despite economic hardships.
As with McDonald’s above, Colgate-Palmolive also features pricing power and flexibility. Currently, the company features a gross margin of 57.68%, above 90% of sector players. Also, it enjoys excellent profit margins, which will be important heading into a potentially growth-challenged environment.
Is CL Stock a Buy?
Turning to Wall Street, CL stock has a Moderate Buy consensus rating based on six Buys, seven Holds, and zero Sells. The average CL price target is $79.58, implying 0.16% upside potential.
Defensive Stocks Might be the Best Bet
Although optimism may be a valuable trait in most avenues of life, investors need to recognize certain harsh realities. With the Fed doggedly committed to attacking inflation through higher rates, a recession may be likely. Therefore, investors should concentrate on stocks that can weather economic storms.
