Market conditions these days are best described as ‘unsettled.’ Amidst stubbornly high inflation, a Federal Reserve shift to rapid interest rate hikes, and lackluster economic growth, the punditry is all but certain that we’re on course for a recession – if it’s not here already.
Some stocks are more resistant to recession than others, and investors can look for those when making investment choices now. Start with companies that are financially healthy and profitable, and better yet, are able to keep up their cash flow no matter how the markets go. Sort through those to find companies that offer things consumers need. Utilities, healthcare, and essential technologies (semiconductor chips come to mind) will all find plenty of business even in a downturn.
Bearing this in mind, analysts have highlighted two stocks that make compelling investments when the alarm has been sounded by key recession indicators. Let’s take a closer look.
Pure Storage, Inc. (PSTG)
First up is a semiconductor chip company, Pure Storage. The name is a giveaway; this company focuses on computer memory chips. Pure Storage offers a line of products for a range of applications, to solve memory issues no matter what the scale, including large-scale cloud computing. The company can provide everything from solid-state flash drives to large-scale FlashStack servers to power data centers. Pure Storage boasts over 10,000 customers worldwide, and a market cap over $8 billion.
Pure Storage will release its next quarterly financial report, for the third quarter of fiscal year 2023, next month – but we can get a feel for the company’s current status by a look at its last report, for fiscal 2Q23. The company showed a top line of $646.8 million, up 30% year-over-year, and the second-highest print of the past two years. The company’s revenue gains were supported by increases in two important metrics, subscription annual recurring revenue, ARR, which was up 31% y/y at $955.3 million, and subscription services, which rose 35% y/y to hit $232.2 million.
The solid revenues also supported solid earnings. Pure Storage showed a non-GAAP diluted EPS of 32 cents per share, more than double the 14 cents reported in the year-ago quarter, and beating the 22-cent forecast by 45%.
This all goes to show that memory chips are in demand – but on the other metric of a ‘recession proof’ stock, cash on hand, Pure Storage still shines. The company reported having cash and liquid assets of $1.4 billion as of the end of F2Q23, and free cash flow of $134.2 million.
All of this has caught the attention of Cowen’s 5-star analyst Krish Sankar, who agrees that this stock shows all the signs of being recession resistant.
“We feel confident in Pure’s ability to grow earnings into CY23 even when assuming a modest recession scenario. It is worth pointing out that Pure was able to grow its revs in CY19 and CY20 when the ECB market was flat and down -5%, respectively… Additionally, in a recessionary environment in which SSD prices drop (which is happening), enterprise customers usually switch to AFA storage, benefiting Pure as a result,” Sankar noted.
“Lastly,” the analyst added, “it’s worth highlighting the consistency of share gains driven by lower energy consumption of PSTG products (company claims its products consume up to 80% less energy vs competition), which should help revenues in more macro challenged/power constrained areas like Europe.”
Following from his bullish outlook, Sankar rates PSTG stock an Outperform (i.e. Buy), and his price target, of $37, implies a one-year upside potential of 33%. (To watch Sankar’s track record, click here)
Overall, it’s clear from the 15 recent analyst reviews that the Street is in line with the bull here – the stock has 12 Buys against 3 Holds, for a Strong Buy consensus rating. Shares in PTSG are selling for $27.75 and their $39.33 average price target suggests an upside of ~42% in the next 12 months. (See PSTG stock forecast on TipRanks)
Chemed Corporation (CHE)
We’ll now look at a company that embodies not one, but two essential services that can make a stock ‘recession proof.’ Chemed Corp is a holding company and the owner of two subsidiaries – VITAS Healthcare, which provides end-of-life hospice care, and Roto-Rooter, a leader in the field of plumbing, drain cleaning, and water cleanup services. For most of us, most of the time, these are not services that we ordinarily think about – but when they are needed, they are essential.
A quick look at the company’s financial standing will show that providing essential services is profitable. Chemed reported $531 million in revenue for 2Q22, flat year-over-year, while earnings slightly grew from the year-ago quarter. The adjusted EPS came in at $4.84 per diluted share, for a 5.2% y/y gain.
The company’s results saw most of their support from the Roto-Rooter segment, which reported a 6% y/y revenue gain, to $233 million, and an 8.8% increase in net income, to $48.8 million. This offset a 4.5% y/y revenue drop from VITAS.
A profitable business model, with plenty of customer demand, has caught the eye of Oppenheimer’s 5-star analyst Michael Wiederhorn, who can’t resist a small pun when he says of the stock, ‘no clogs here.’
Getting into details, Wiederhorn writes: “We believe the story remains on track. Roto-Rooter remains well-positioned due to its durable demand and recession-resistant characteristics. Meanwhile, Vitas continues to manage through the challenging labor environment by leveraging its new recruitment and retention program, which should drive market share gains going forward. Given the current environment, Chemed remains a compelling investment with an attractive valuation, especially given its history of operational outperformance during recessionary environments.”
The analyst’s comments back up his Outperform (i.e. Buy) rating on the shares, and his price target, which he has set at $580, indicates room for 30% share appreciation in the coming year. (To watch Wiederhorn’s track record, click here)
Chemed has only picked up two recent analyst recommendations, but they are both in agreement that it’s a stock to Buy, making the Moderate Buy consensus unanimous. Chemed shares are priced at $445.79, and their $560.50 average target implies an upside of ~26% on the one-year horizon. (See CHE stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
