Fears of inflation dominated the first part of 2022. UK stocks in the oil and gas and mining businesses did well. Now fears of a recession are starting to dominate. I think it’s about time I looked for stocks and shares that could offer some protection for my portfolio if a recession hits.
Recession-proof UK stocks don’t exist
There’s no such thing as a recession-proof stock, but some stocks are more sensitive than others to the peaks and troughs — or booms and busts — of the business cycle. Cyclical stocks tend to follow the ups and downs in an economy. When a recession hits, cyclical shares tend to perform poorly and fall in price. On the other hand, defensive stocks are less affected by the economy. There are also sensitive stocks that fall somewhere in between.
Defensive stocks can be found in the following sectors:
- Consumer defensive
There are hundreds, if not thousands, of UK stocks in the consumer defensive, healthcare, and utility sectors. I can’t buy them all but I could look for a fund that invests in these sectors. Yet I would prefer to pick my own stocks. So I need something to help me select companies with a recession in mind. That something is quality.
Quality UK stocks
Quality stocks tend to have higher margins, profitability, and cash flow than their peers. Strong balance sheets and stable or improved business operations are also hallmarks of quality stocks. These features are sought after by investors when a recession is looming and during one. In my opinion, quality is never out of fashion.
Key quality measures
|Stock||Ticker||Sector||Sales growth (5Y CAGR)||Operating margin (5Y average)||Return on capital employed (5y average)||Free cash flow growth (5Y CAGR)||Interest coverage (TTM)||Net leverage (TTM)|
|A G Barr||BAG||Consumer defensives||1%||16%||15%||2%||107x||-26%|
Two stocks have caught my eye for quality and defensive sector membership: healthcare stock Bioventix and AG Barr from consumer defensives. One quality non-defensive sector name also struck me as worthwhile. Given that I was looking for stocks to add to my stocks and shares ISA for a recession, this company’s business model had immediate appeal. That stock was FTSE 100 member Experian. The company owns a database of millions of consumers’ and businesses’ credit activity and repayment histories. It sounds like the sort of outfit that might see demand for its services holding up when the economy sours.
Taking stock of recession risks
I’m intrigued by these three stocks. They look good on measures of quality. Two are from defensive sectors, and one has a business model that seems like it should hold up well in a recession. So, do I buy these three UK stocks for my Stocks and Shares ISA? Not without further research.
Although consumers will likely cut spending on food and beverages less severely than on, say, eating out and cinema visits during a recession, will they switch from AG Barr’s brands to cheaper alternatives?
Bioventrix makes antibodies for diagnostic procedures and drug and compound detection. I want to know what proportion of its sales goes to organisations less likely to cut spending dramatically in a recession (like, for example, the NHS).
For Experian, although checking credit seems to make sense when times are tough, in a prolonged and severe recession, would reduced spending render its services redundant? These are some questions I must mull over before pulling the trigger on any of these three UK stocks.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr, Bioventix, and Experian. 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.