A recession in the United States is likely within the next year or two, according to many economists.
Indeed, 74% of U.S. business economists surveyed last month by the National Association for Business Economics predict a recession by the end of 2021, with 40% of them projecting a recession will occur by the end of next year. Many economists believe the trade war with our largest trading partner, China, could be a major catalyst in pushing the economy into a recession.
If you’re on board with this thinking, you might consider shifting your stock portfolio to a more defensive stance. Three great stocks that are recession-proof — or at least highly recession-resistant — are water utility leader American Water Works (NYSE:AWK), snack food maker J&J Snack Foods (NASDAQ:JJSF), and electric utility and renewable energy giant NextEra Energy (NYSE:NEE).
Recession-resistant stocks overview
| Company | Market Cap | Dividend Yield | Projected Average Annual EPS Growth Over Next 5 Years* | 10-Year Stock Return | Return During Great Recession** |
|---|---|---|---|---|---|
| American Water Works | $22.1 billion | 1.6% | 8.2% | 692% | (12.7%)*** |
| J&J Snack Foods | $3.6 billion | 1% | 6% | 397% | 18.1% |
| NextEra Energy | $110 billion | 2.2% | 8% | 473% | (9.6%) |
| S&P 500 | — | 1.87% | — | 244% | (35.6%) |
American Water
Water utilities are one of the most recession-resistant industries, which makes perfect sense because the majority of consumers — at least those in developed countries such as the U.S. — aren’t likely to cut back on their fresh water consumption even during quite difficult economic times.
While “all men are created equal,” according to Thomas Jefferson, this isn’t true of water utilities. There are several solid choices in this group, but American Water Works is the best fit for many investors, in my opinion. The New Jersey-based company is the largest and most geographically diverse publicly traded U.S. water utility, with regulated operations in 16 states and a presence in 46 states plus one Canadian province. These two traits combine to give it a competitive advantage with respect to acquisitions — an important edge in an industry that is fragmented and ripe for further consolidation.
J&J Snack Foods
The consumer staples sector is usually quite hardy during recessions, as it’s comprised of industries that make products that most of us consider necessities, such as food and beverages and personal care products.
A top stock that bridges this sector and the recession-resistant category called “lipstick stocks” is J&J Snack Foods, a Philadelphia area-based maker of niche snack foods and frozen beverages. “Lipstick stocks” refer to the stocks of companies that make affordable indulgences. Some research has shown that sales of products in this category actually increase during economic downturns. The reasoning goes that people buy more smaller “treats” in order to reward themselves for delaying purchasing bigger-ticket items.
J&J Snack Foods, which distributes its products via retailers and food service companies, is probably best known for its Superpretzel soft pretzels — the global market leader in frozen soft pretzels — and Icee frozen beverages. The company, founded in 1971, began as a maker of frozen soft pretzels — the Philadelphia area is considered the soft pretzel capital of the U.S. — and has shrewdly expanded its product offerings mostly via acquisitions and licensing agreements. In 1988, for instance, it acquired California-based Icee, which pioneered the category of partially frozen beverages dispensed by machines. J&J distributes its products throughout the country as well as internationally.
NextEra Energy
Electric utilities generally hold up quite well when the economy goes south, as they provide a product that most of us would find tough to live without ever for a relatively short time.
NextEra Energy is a top stock choice in the electric utility industry. The Florida-based company owns two electric companies in its home state — Florida Power & Light, or FPL, being the largest — that combined serve more than 5.5 million customers. Moreover, it has the key distinction of being the world’s largest generator of renewable energy from the wind and sun. The cost of generating renewable energy should continue to decline for some time, providing a tailwind for NextEra’s profits.
