If I Could Only Buy 3 Stocks For The Next Recession

Summary

• The odds of a recession hitting are rising.
• This will likely lead to a market downturn and potentially some dividend cuts.
• I share three picks that are likely to outperform and even potentially benefit if a recession were to hit.

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With unemployment rising and consumer credit card debt reaching record levels recently, now is the time to position a portfolio that can withstand an economic downturn that is increasingly likely to come. In this article, I will lay out three stocks that I would buy if I could only buy three for the next recession.

Stock #1

The first stock I would buy is Virtu Financial (VIRT). VIRT is a market maker that profits from market volatility because when markets get volatile, bid-ask spreads tend to widen, and the sheer volume of trades tends to increase. When this happens, VIRT's profitability on each trade executed increases, and the number of trades executed also tends to increase. This is evidenced by the fact that they generated enormous profitability during the 2008 crash and also made huge profits during the 2020 COVID crash.

On top of that, they have a very well-covered dividend that currently yields 3.5%, and they are buying back stock very aggressively. Combined with the fact that they have a very asset-light balance sheet with well-termed-out debt, strong insider alignment with regular insider purchases by the CEO, and a P/E ratio of about nine times, VIRT looks like a great pick right now.

The reason we are specifically bullish on it in a potential downturn is that the market has been soaring higher recently due to bullishness about the AI boom as well as growing expectations for a soft landing for the economy. If these rosy forecasts are revised downward, as the warning signs indicated just a few days ago, this could lead to massive volatility in the markets and potentially send them plunging lower. This would likely result in strong profits for VIRT at a time when the rest of the economy and market would be struggling. As a result, VIRT could not only preserve your portfolio's value during a downturn but also pay you a nice, attractive dividend while you wait. Additionally, their aggressive stock buybacks provide a source of capital that you could tap into to buy high-quality stocks on the cheap in the next market crash. As such, it makes for a nice form of portfolio insurance while also paying you to wait.

Stock #2

The next stock I would buy would be Barrick Gold (GOLD). The reason I like Barrick Gold so much right now is because it is significantly undervalued relative to its mining peers (GDX) and its own historical valuation multiples. For example, on a price-to-NAV basis, it trades at a 13% discount to its net asset value, despite historically trading at a 20% premium to its net asset value. In contrast, peer blue chip miner Newmont Corporation (NEM) trades at a 14% premium to their NAV, and Agnico Eagle Mines Limited (AEM) trades at a 52% premium to its net asset value. Despite all three of them having very strong balance sheets, significant Tier 1 gold mine exposure, and significant copper exposure, GOLD has greater geopolitical risk than NEM and AEM due to its greater exposure to riskier geographies like Pakistan and Africa. However, Barrick is an experienced operator in these jurisdictions and has proven to be fairly capable of resolving geopolitical risks. Given that gold tends to soar during periods of Federal Reserve rate cuts and macroeconomic and geopolitical uncertainty, GOLD is likely to enjoy some strong macro tailwinds moving forward, especially if the economy continues to deteriorate.

Stock #3

The third and final stock I would buy in anticipation of a recession is Enterprise Products Partners (EPD). The reason I like EPD so much right now is that while it is possible, it could face some stock market headwinds from declining oil prices due to concerns about declining economic activity, it has proven to be very resistant to market volatility.

For example, its balance sheet is very strong with an A- credit rating, a leverage ratio of 3.0 times debt to EBITDA, and virtually all of its debt is termed out at least 10 years, with a very large percentage termed out for 30 years or more. EPD has enormous liquidity, generates significant free cash flow, and has a distribution yield of over 7% that is covered 1.7 times by distributable cash flow. It has been growing its distribution at 5% or more per year and has a robust growth pipeline. Best of all, it has generated consistent returns on invested capital of over 10% even through the COVID crash and the 2018 energy market crash. Its portfolio, the vast majority of which enjoys long-term contracts and relatively little commodity price exposure, is likely to hold up quite well during a recession while continuing to pay out and grow its hefty distributions and make opportunistic investments for the long term.

Investor Takeaway

While the emergence of a recession would likely weigh heavily on the stock market, if you buy these three picks, you get a nice yield, strong buybacks, and significant diversification that should have relatively low correlation with the broader stock market. This will enable investors to have a portfolio that holds up quite well not only on an income generation basis but even on a principal basis during a recession and corresponding market downturn. While nothing is for certain, these three stocks, in my view, are must-owns at this current macroeconomic and market juncture.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.