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Stocks mentioned: British American Tobacco PLC (BATS), Bayer AG ADR (BAYRY), Anheuser-Busch InBev SA/NV ADR (BUD), Dominion Energy Inc (D), GSK PLC ADR (GSK), Imperial Brands PLC (IMB), Medtronic PLC (MDT), Roche Holding AG (ROG), Sanofi SA ADR (SNY), Zimmer Biomet Holdings Inc (ZBH)
Depending who you talk to, we may or may not be in a recession. The textbook definition of an economic recession is two consecutive quarters of decline in gross domestic product, which we’ve experienced in 2022. However, other economic indicators that often fall during recession—including employment growth—have trended up so far this year.
“While a recession isn’t here yet, growth is slowing,” says Morningstar’s head of U.S. economics Preston Caldwell. Morningstar has pulled back its near-term GDP forecasts to 1.6% in 2022 and 1.0% in 2023 and expects growth to rebound in 2024.
Given all the talk of recessions across the globe—current or perhaps impending—investors may be thinking about adding some recession-resistant stocks to their portfolios.
Recession-resistant stocks are stocks of companies whose products and services consumers will continue to purchase no matter the economic climate. In a slowing economy, consumers will generally still fill their prescriptions, seek medical care, practice good hygiene, and enjoy their favourite beverages and snacks. They’ll also continue to pay for running water, electricity, and gas to heat their homes.
Stocks that meet this definition of “recession resistant” often share these qualities.
These were the 10 most undervalued stocks as of Oct. 10, 2022, that Morningstar’s analysts cover and fit our definition of recession resistant.
Here’s a little bit about each of these stocks, along with some key Morningstar metrics.
Anheuser-Busch InBev stock is a buy, trading 50% below our fair value estimate. The largest brewer in the world, AB InBev benefits from a significant cost advantage relative to its competitors, which creates meaningful barriers to entry, and therefore provides a substantial competitive advantage, or wide economic moat, says Morningstar director Philip Gorham. We think AB InBev stock is worth US$90.
Bayer stock is selling 42% below what we think it’s worth. The German healthcare and agriculture conglomerate has carved out a wide economic moat largely on the strength of its healthcare group, with key drugs in hemophilia and ophthalmology, as well as a consumer business that includes brands such as Aspirin and Aleve, says Morningstar sector director Damien Conover. We give the stock a US$20 fair value.
GSK stock looks mispriced, as shares trade 40% below what we think they’re worth. GSK is one of the largest pharmaceutical and vaccine companies worldwide by total sales. Patents, economies of scale, and a powerful distribution network support the drugmaker’s wide economic moat rating, argues Morningstar’s Conover. We think GSK stock’s fair value is US$50.
Zimmer Biomet stock looks cheap by our metrics, selling 38% below our fair value estimate. Zimmer manufactures orthopedic reconstructive implants. We award the company a wide economic moat rating thanks in part to the high switching costs that orthopedic surgeons would face if they transitioned to another company’s instrumentation, says Morningstar senior analyst Debbie Wang. We think Zimmer Biomet stock is worth US$175.
Imperial Brands stock trades 38% below our fair value estimate. One of the world’s largest international tobacco companies, Imperial Brands benefits from tight government regulations that make barriers to entry almost insurmountable, says Morningstar’s Gorham. That and brand loyalty support the company’s wide economic moat. We assign Imperial Brands stock a US$36 fair value estimate.
Medtronic stock is 36% undervalued. One of the largest medical device companies focused on therapeutic medical devices for chronic diseases, Medtronic (like Zimmer) enjoys high switching costs. Its intellectual property and relationship with physicians also contribute to its wide moat, says Morningstar’s Wang. We assign Medtronic stock a US$129 fair value estimate.
Sanofi stock is about 32% undervalued, according to our metrics. The drugmaker maintains a wide lineup of branded drugs and vaccines—including immunology drug Dupixent—as well as a robust pipeline. Growth of existing products and new product launches should offset upcoming patent losses, argues Morningstar’s Conover. We assign Sanofi stock a fair value estimate of US$57.
British American Tobacco stock is cheap, trading 26% below our fair value estimate. One of the two largest listed global tobacco companies, British American Tobacco possesses a strong franchise and cost advantages, which have led to a wide economic moat rating, says Gorham. We think British American Tobacco stock is worth US$50 per share.
Roche stock is 26% undervalued, according to our measures. Roche is a biopharmaceutical and diagnostic company that holds the leadership position in both oncology therapeutics and in vitro diagnostics; as a result, the drugmaker earns a wide economic moat rating, says Morningstar sector strategist Karen Andersen. We assign Roche stock a US$55 fair value estimate.
Dominion Energy stock appears to be about 21% undervalued according to our metrics. The integrated energy company operates in a constructive regulatory environment and is pursuing a sizable growth plan in the next five years focused on decarbonisaton, says Morningstar senior analyst Andrew Bischof. We assign Dominion Energy stock a fair value estimate of US$82.
Susan Dziubinski is director of content for Morningstar.com. Analysis as at 20 October 2022. This information has been provided by Firstlinks, a publication of Morningstar Australasia (ABN: 95 090 665 544, AFSL 240892), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.