What stocks to buy during a recession? 

Overall, our expectations are that the majority of Blue Chip stocks will live up to their name and remain profit machines. The market is supporting this. The ASX/S&P All Ordinaries Index is well above 6,000 points, having rebounded third from its multi-year lows following the sell off and 16% shy of its record high in late February. The rebound has been driven by the Blue Chip stocks. Whether they can keep driving it upward is one question, but what is more interesting is which Blue Chip stocks will be winners and losers arising out of the upcoming reporting season.
 
Business models are being tested during these difficult times. Stock picking is the key and that is where Under the Radar Report comes in. We tell ASX investors which ASX stocks to buy and when. If you are not a subscriber, sign up here and access issue 404.
 
Dividends are the obvious metrics to focus on for ASX Australian investors, who perennially look to take advantage of imputation credits. Domestic corporates historically have been playing up to this, but it has come at the expense of balance sheet strength and subsequently led to big equity capital raisings. Importantly, this reporting season should be different.
 
In light of renewed lockdowns, balance sheet strength will be front of mind for investors and hence we do not think that companies will be punished for not paying/increasing final dividends. Surviving and thriving is what is paramount. We break it down by sector:

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Bank and property 

Key stocks in these two big sectors have been conspicuous in not bouncing back, being the most vulnerable to rolling lockdowns. The banks and property trusts are highly exposed because unemployment and labour markets in general don’t recover quickly from disruption. While the banks are here to stay and are well capitalised, the same cannot be said for the big property companies.
 
Commonwealth Bank (CBA) is the only big bank to report, while the property sector heavyweights are many and varied and it gets more complicated: commercial and residential, Stockland (SGP) and Mirvac (MGR),  shopping centres and offices, GPT Group (GTP),  pure retail, Vicinity Centres (VCX) and Scentre Group (SCG).
 
The silver lining for all these companies is that compared to the financial crisis the situation is much less dire. It took years for the economy to recover from an undercapitalised financial system. The current crisis does not seem to have the same overhang, although we are still in the midst of the pandemic that could persist for some time and governments are racking up debt that will have to be repaid.

Resources 

The Chinese stock market is going gang busters, which is usually a good barometer of economic activity for the second biggest economy in the world. Iron ore trades at above $100 a tonne and miners are well placed to ramp up production and are weathering the COVID-19 storm better than most had expected, which should be evidenced in upcoming results.
 
Subsequent to the financial crisis of late 2007 to 2010, the sector has been conspicuous in paying out capital to shareholders via buybacks/dividends. We should see these companies being more cautious, in light of the pandemic, retaining more capital to work on restoring balance sheets. In the long-run this is a positive and investors should rationalise this as insurance.

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Consumer staples

The grocery retailers Woolworths (WOW), Coles (COL) and Metcash (MTS) should produce solid profit results, albeit with complications such as JobKeeper and the effects of hoarding. Buoyant sales will be offset by higher costs. These stocks have rebounded but have been trading in tighter ranges than cyclicals. Anecdotal feedback suggests they’re not seeing shortages in products, which means that the hoarding at the outset of the crisis has abated. People are sitting on piles of toilet paper from three months ago.

For WOW we are looking for details about the planned de-merger from its hotel and drinks business Endeavour Group (Dan Murphy’s, BWS and others) which was deferred; as well as news on the construction of its two automated distribution centres in Sydney.

Industrials

In the eye of the COVID-19 lockdown storm are Sydney Airport (SYD), Transurban (TCL) and Qantas (QAN). On other side of this their industries will bounce back, the question continues to be how high. It’s too late to trim positions and we wouldn’t be buying. Commentary will be all important, alongside balance sheet strength. We are most nervous about Qantas.
 
We are comfortable with pipeline operator APA Group (APA), paper and packaging group Amcor (AMC) and contractors Downer EDI (DOW) and Lendlease (LLC), as well as with telco giant Telstra (TLS). The infrastructure thematic is still in play and Telstra provides good defensive exposure.

Energy

Oil exposure is a concern, with a big question about the aviation fuel price. We’ll be listening to company commentary carefully and monitoring balance sheets. Read about energy contractor Worley (WOR) on page x. We are impressed that it has diversified away from a customer base focused on fossil fuel towards renewable energy/chemicals through its 2019 acquisition.

Health

In general these stocks don’t rate well on value metrics, but we will consider buying stocks dependent upon upcoming results. It’s a case of watch this space.