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6 Growth Stocks That Look Recession-Resistant, According to Morgan Stanley

Colgate-Palmolive stock is one pick that could still rise in the face of a consumer-spending slump, says Morgan Stanley.

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Normally, buying “defensive” stocks protects the portfolio against a potential recession, but it also usually means accepting what may be smaller gains. The good news is that Morgan Stanley equity strategists screened for defensive names that also offer fairly high growth—so they can still produce high returns.?

That’蝉 an important strategy because a recession, believe it or not, remains a risk for this market. Many on Wall street thought a recession was likely this year because the Federal Reserve had already implemented most of its interest-rate hikes, which are meant to reduce inflation by squelching economic demand. But demand has held up relatively well. Given the delayed impact of higher rates on the economy, economic growth could continue to slow down, and a recession could arrive next year.?

That’蝉 a reason some investors will seek protection. Defensive stocks are conventionally less volatile than the broader market. They may have ample cash on the balance sheet for ballast, or they may be in sectors less subject to spending pullbacks by consumer and businesses. Think about stable businesses such as groceries, small household products, healthcare insurance, drug makers or utilities. Many of these companies also pay dividends. The catch is that some of those businesses are on the mature side, and offer less upside in the face of an economy running full steam.

Enter Morgan Stanley’蝉 screen of companies with the 1,000-largest market capitalizations. In that universe, the analysts selected stocks with below average volatility in the past 252 days. The stocks that made the screen had to be classified as a “growth stock” by the bank’蝉 statistical model, and have Overweight ratings from the relevant Morgan Stanley analysts. Names on the list include Apple (AAPL), Boston Scientific (BSX), Costco Wholesale (COST), and Monster Beverage (MNST), which is a recent 叠补谤谤辞苍’蝉 stock pick.?

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Another is UnitedHealth Group (UNH). Health insurance certainly isn’t something folks cut out of their budgets when money is tight. Plus, analysts are looking for annualized sales growth of about 8% for the next three years beyond 2023 to $463 billion in 2026, according to FactSet, as the company brings in close to a million new Medicare advantage members annually. Profit margins should rise a touch over the next few years as the company’蝉 medical-cost ratio—the percentage of revenue it has to pay out for patients—drops after this year’蝉 catch-up on elective procedures. That should spur earnings-per-share growth of about 12% annually for the next three years to about $35.71 by 2026.?

Growth on the bottom line could lift UnitedHealth stock, since it isn’t terribly expensive. Shares trade at about 18.7 times earnings-per-share estimates for the next year, only a touch over the S&P 500’蝉 18 times, while UnitedHealth’蝉 earnings should grow faster than aggregate earnings for the index.

There’蝉 also Colgate-Palmolive stock (CL). Consumers don’t neglect personal hygiene when they’re watching their budgets, and analysts expect sales to grow annually at just over 4% to $21.9 billion in 2026. The company recently announced small price increases in the near term, but expects revenue to ultimately grow from higher sales volumes. Management also mentioned moderating costs going forward, and analysts expect operating margins to rise back to near prepandemic levels. That should drive earnings-per-share growth of about 8% annually for the next three years to $3.99 by 2026. To be sure, the stock does trade at an expensive 21 times forward earnings, but it could remain at that valuation if a recession hits, and investors pile into consumer-staples names.?

Give these stocks a shot.?

Write to Jacob Sonenshine at [email protected]