Last week, the Chancellor announced that the UK is now in a recession. All companies will feel the impact of an economic downturn in some way. And stocks may continue to be volatile.
Yet it’s important to remember that the British economy has historically always bounced back from a downturn. With that in mind, here’s two stocks I’d double down on during a recession.
It’s pretty well established that people don’t give up their vices during a recession. Less money may be spent on restaurant dining, but consumers still purchase their favourite alcohol brands. These drinks become affordable luxuries, especially premium spirits.
So the first stock I’d double down on is drinks giant Diageo (LSE: DGE). Its portfolio of leading brands includes top-selling scotch Johnnie Walker, Baileys liqueur, and Casamigos, the premium tequila brand co-founded by George Clooney.
In its 2010 annual report (which covered the 2009 recession), Diageo posted net profit of £1.6bn on full-year revenue of £9.3bn. That was a 5% increase in revenue year on year, but net sales were 3% lower in the US and 2% lower in Europe. The outlook was very uncertain.
Fast-forward to this year, and Diageo recorded double-digit net sales growth across all world regions. Its fiscal 2022 full-year net sales grew 21% over the year before, reaching £15.5bn. Net profit was a very healthy £3.2bn.
Since the start of 2009, Diageo’s share price is up 297%, without including the growing dividends. That type of return will be hard to replicate, but I think patient shareholders like me could still be handsomely rewarded.
Another stock that accelerated out of the last recession was Experian (LSE: EXPN). From being down 50% in October 2008, it has gone up a staggering 948%, excluding dividends. Why?
Well, the consumer data giant has an operating margin regularly above 20% and is very profitable. It forms a triopoly with two other companies within the credit reporting industry. And the firm has credit data on over 1bn people and tens of millions of businesses worldwide.
Its customers, such as banks and insurance firms, pay for this data in the form of credit reports and other add-on services.
During the last recession, the company reported that its data was in demand “across an ever-broadening range of markets”. This expansion continues today, with Experian recently reporting that it’s winning more clients in the energy and utility sectors. These companies increasingly need data to assess the impact energy price hikes are having on households.
Lenders need up-to-date credit information to adjust their lending criteria, especially during a recession. With 1.3bn updates to its databases every month, Experian has the vital consumer data that organisations need.
Of course, past performance is no guide to future returns. The demand for Diageo’s products could dry up (pardon the pun) if the forthcoming recession lasts a long time.
Meanwhile, the stock has a rich price-to-earnings (P/E) ratio of 27, which reflects investors’ high expectations of rising future earnings. Were this growth to stall unexpectedly, the stock could be re-rated and fall in price.
However, risks aside, I like the prospects for both. I’ll add to my positions in each of them during the recession.
Ben McPoland has positions in Diageo and Experian. The Motley Fool UK has recommended Diageo 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.
Motley Fool UK 2022