Playing defense as market tumbles — 10 stocks that outperform in recessions

Published Thu, Mar 16 202311:02 AM EDTUpdated Thu, Mar 16 202311:23 AM EDT

As the market tumbles and recession risks rise, it's time to start playing defense and buying stocks that are poised to outperform in the later innings of the U.S. market cycle, according to Wolfe Research. That includes the final retrenchment phase when the economy is in a recession, analyst Chris Senyek wrote in a note Wednesday. Investors appear to be anticipating a recession is near , according to several market signals. Bond yields have fallen, oil prices have steeply dropped and stock market volatility has surged. On Thursday, that volatility continued amid growing fears of a banking crisis and reports that JPMorgan Chase and Morgan Stanley were in talks to provide some aid to First Republic , the worst hit of the regional banks. The sector has been slammed since shortly before the failure of Silicon Valley Bank and Signature Bank, despite U.S. regulators announcing Sunday they would backstop the banks' depositors. Bank shares were further hit after Credit Suisse said it found "material weakness" in its 2021 and 2021 financial results, and after Saudi National Bank said it wouldn't provide further financial help beyond its 10% stake. Late Wednesday, Credit Suisse announced overnight it will borrow up to $54 billion from the Swiss National Bank. "Just looking at the banking sector that was already dealing with the repercussions of higher interest rates and the impact on net interest margins and now, after the Silicon Valley Bank debacle, we're going to be looking at potential capital raises, tighter regulations and, most importantly, the start of a consumer credit cycle, which puts us in the camp of 'when' not 'if' a recession [happens]," Saira Malik, chief investment officer at Nuveen, said in an interview with CNBC's " Closing Bell: Overtime " Wednesday. With that in mind, here are 10 of the stocks that Wolfe Research believes outperform the rest of the market during a recession. AT & T , which has gained 12% over the last year and has a 6% dividend yield. The cell phone network's estimated 2023 price to earnings (P/E) ratio is 7.6x, while its enterprise value (EV) to its estimated 2023 earnings before interest, taxes, depreciation and amortization (EBITDA) is 6.2x. In January, AT & T reported fourth-quarter subscriber growth that beat Wall Street's expectations. The company is also exploring the sale of its cybersecurity division as part of its efforts to pay down debt, Reuters reported in February. McDonald's has seen its shares rise 21% over the past 12 months. It has an estimated 2023 P/E of 24.7x and an EV/2023 estimated EBITDA of 16.4x. The fast-food chain topped analyst estimates when it reported fourth-quarter earnings in late January, but CEO Chris Kempczinski said he expects "short-term inflationary pressures to continue in 2023." Walmart also cited pressures on consumer spending power for its softer outlook during its earnings conference call in February. But the nation's largest retailer may also benefit from consumers who trade down — essentially trading in pricier options for something less expensive, like a store brand. Walmart has the largest share, 25%, of the private label market among omnichannel retailers, according to Numerator. The big-box retailer's stock is down 2% over the past year and carries a 1.7% dividend yield. It has a 22.4x P/E ratio and a 10.7x EV/2023 estimated EBITDA. Lastly, shares of Eli Lilly gained 20% over the past 12 months and yield 1.4%. The drugmaker has an estimated 2023 P/E of 37.2x and an EV/2023 estimated EBITDA of 28.7x. Last week, Lilly halted development of its Alzheimer's treatment, solanezumab, after it failed to slow disease progression. On Thursday, Morgan Stanley reiterated an overweight rating on the stock. "We expect data from the Mounjaro SURMOUNT-2 Ph3 obesity trial over the near-term, which are key to enable LLY to file for an expanded obesity label," Morgan Stanley wrote in a note to clients. — CNBC's Michael Bloom contributed reporting.