By Rich Duprey
KEY POINTS
- The economy is giving mixed signals, but investors should prepare for every option.
- Certain tech stocks can thrive in difficult times as well as in bull markets.
If there's an extended downturn coming, you want these three tech companies to have your back.
The recent jobs report has many believing we may just squeak past a recession. Over 550,000 new jobs were reported in June, twice what was expected, and gas prices have dropped sharply over the past month, although they are still much higher than they were more than a year ago.
Yet those are also signs of an economy that is heating up again, which could force the Federal Reserve to be even more aggressive in raising interest rates. That's why it's still prudent to plan for the worst and hope for the best. An officialrecessionmay still be in our future, and we need to gird our portfolios for that possibility.
Choosing stocks that can weather the storm and do well afterward, too, are the kinds of companies we should seek out, and the following trio of top tech stocks should outperform no matter what the market throws at it.
1. AT&T
Having shed its Warner Media division into the newly reconstituted Warner Bros Discovery in April,AT&T($AT&T Inc(T)$ )is now able to focus solely on its telecom operations and the rollout of its 5G networkthat will provide the industry with its next wave of growth.
Although AT&T says it's not immune from the recessionary impacts affecting the broader economy, it's capable of managing through them and investing for the long-term benefit of customers and investors.
The national rollout of 5G networks should encourage a steady device replacement cycle by consumers and enterprise-level customers. AT&T is already seeing the benefit of its system upgrades withhistoric levels of net customer additionsin the second quarter with 5.5 million net additions, while also adding 789,000 postpaid net phone additions, the most it's seen in the period in a decade.
With a dividend that yields 6.1% annually and a stock that trades at just six times trailing earnings and seven times next year's estimates but is also going for 12 times the free cash flow it produces, AT&T is a stock built for a recession and beyond.
2. Broadcom
The 5G rollout will also benefit chipmaker Broadcom($Broadcom(AVGO)$ ), which generates most of its revenue from its next-gen wireless chips that go into smartphones. It's been about 10 years since there has been any meaningful upgrade to the speed of mobile downloads, and the replacement cycle that will carry AT&T forward will, of necessity, lift Broadcom higher through the middle of the decade and likely beyond.
While the mobile component is obviously the key driver, Broadcom hasbuilt up additional businessesin the data center and automotive business. In particular, data center growth could be an equally important aspect of the growth story as Broadcom's chips have seen a 40x increase in performance in less than a decade as it introduces a new generation of data center switch chips approximately every 18 months to two years.
Broadcom has a hardware backlog of $29 billion at the end of the second quarter and a software backlog of $15 billion, up 38% and 7%, respectively, from a year ago. Any recession will obviously impact results, but it has sustainable customer demand to make it through any rough period.
3. Upstart Holdings
The third member of our triumvirate of top tech stocks to weather a recessionary storm is online lender Upstart Holdings($Upstart Holdings, Inc.(UPST)$ ), an admittedly counterintuitive choice for a period where the Fed is raising interest rates hand over fist.
With those massive job gains just reported, the Fed governors will be hard-pressed not to keep raising rates higher to cool off an economy that could be heating up again. That's why we may not be out of the recession woods just yet, but Upstart should still be able to navigate the choppy waters.
Because Upstart eschews the traditional methods of vetting a loan in favor of using artificial intelligence (AI), it's able to save critical time for borrowers and offer savings for lenders, all without adding any additional risk.
Even though Upstart's approved borrowerstend to have a lower average credit scorethan those approved by their traditionally vetted counterparts, the online lender's loss rates are actually lower than the competition. That means Upstart can offer lenders a wider pool of potential customers, which is important since, even in a recession, banks and other financial institutions still need to loan money to survive.
While borrower demand could be hurt in a downturn, Upstart is expanding into new markets, such as small-dollar loans and auto loans, where it can apply itsAI-driven technologyto the same success.
Resource: the Motley Fool
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