With China and the United States continuing to exchange salvos in what may evolve to be a trade war, political uncertainty stemming from the impeachment fervor sweeping through Washington, and the recent report that consumer spending slowed significantly in August, many pundits are positing that we're poised to enter a recession.
The thought of a recession may be unsettling, but there are steps which investors can take to help protect their portfolios, including picking up stocks which can withstand the turbulence of an economic downturn -- stocks like Franco-Nevada Corporation (FNV 1.33%), Idexx Laboratories (IDXX 1.63%), and Casella Waste Systems (CWST 0.96%).
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Go for the gold
When looking for ways to play it safe, many investors seek investments in gold. During the Great Recession, for example, the price of gold climbed more than 19% while the S&P 500 plunged nearly 38%.
But this simple strategy comes with a variety of options, including the buying of bullion, a gold exchange-traded funds, or gold mining stocks. One of the best options currently available to investors, however, is the royalty and streaming company, Franco-Nevada. Digging metals out of the ground is a capital-intensive endeavor for mining companies, so they will often enlist the help of royalty and streaming companies like Franco-Nevada, which provide upfront payments to miners. In return, it receives the rights to purchase the gold (or other metal) at a preset price or to receive a percentage of mineral production from the asset. Consequently, Franco-Nevada is poised to profit from the successful development of mining assets, yet it is involved in neither the development of the projects nor their operations, thus reducing its risk.
Although Franco-Nevada has exposure to silver, platinum group metals, and other materials, it's gold which is the greatest contributor to the company's bottom line. In 2018, for example, gold accounted for 63% of the company's adjusted EBITDA. With 55 energy-related assets in its portfolio, the company is clearly focused on more than solely the yellow stuff, but with 38 projects in the advanced development phase and 200 projects in the exploration phase, investors can be sure that gold will continue to play a central role in the company's portfolio in the future. In fact, management's intent is to generate 80% of revenue from precious metals over the long term.
This dog could have its day
Eating out less often and passing on the latest Hollywood blockbuster at the multiplex are just a couple of ways to help make ends meet during a recession. And when it comes to our pets, maybe people won't buy a new chew toy so quickly after Fido destroys the old one, but for most people, failing to adequately care for their pets will hardly be an possibility. Therefore, Idexx Laboratories, which proclaims itself "the global leader in veterinary diagnostics, software, and water microbiology testing," represents a viable option in the case of a steep economic downturn. Although the company provides services for a wide range of animals, from pets found in the home to livestock found on the farm, it's the former category which represents the company's largest business. In 2018, for example, the companion animal group (CAG) segment, the company's pet health business, accounted for 87% of overall revenue.
Delivering its solutions to customer in more than 175 countries, Idexx Laboratories has a geographically-diversified footprint. How does this relate to its financials? Customers outside the U.S. represented 39% of the company's revenue in 2018. This considerable global exposure, therefore, could help mitigate the risk of a recession adversely affecting the company's business stateside.
There's no getting around taking out the trash
While some local initiatives may take a back seat during troubling times, neglecting the local dump is not an option for municipalities. Consequently, companies that deal in trash and recycling services, like Casella Waste Systems, which operates in six states in the northeastern U.S., are a compelling option for investors concerned about a recession. But it's not merely the fact that Casella Waste Systems can expect the demand for its services to remain strong through trying economic times which makes it attractive, it's also management's commitment to achieving the company's sound financial health.
Image source: Casella Waste Systems.
Over the past five years, the company has reduced its total debt from $537 million in 2014 to $496 million as of the end of Q2 2019. Furthermore, the company has reduced its consolidated net leverage ratio from 5.4 in 2014 to 3.2 as of the end of the recently-completed second quarter. Recognizing the more secure financial position that the company has achieved, S&P Global Ratings upgraded the stock's rating from B+ to BB- this past February, and Moody's upgraded the stock from B1 to Ba3 this past June. And management recognizes that its work at shoring up the balance sheet isn't over. It has identified a consolidated net leverage ratio of 3 to 3.25 by 2021.
Besides the less debt-laden balance sheet, the company's ability to generate strong cash flow suggests that the company is a viable option for investors. Whereas free cash flow represented 2.8% of sales in 2015, it represented 6.1% of sales in 2018 according to Morningstar. And management expects continued growth in the near future, forecasting free cash flow to grow 10% to 15% annually through 2021.
The recession-ready stocks recap
When considering how to prepare a portfolio for a recession, there are typical approaches such as gaining exposure to gold: one of the most common safe-haven investments. And for investors who find this desirable, Franco-Nevada's business model as a specialized financier of sorts is a compelling option. Others, however, looking to eschew the yellow stuff may be more interested in Idexx Laboratories and Casella Waste Systems -- two companies which deal in products and services which will, undoubtedly, remain in high demand even during the most challenging of economic environments.