The shares have had a notable evolution in recent years. Even after the market had to return from the fall it suffered in early 2020, the S&P 500 doubled in value in the past five years.
Of course, nothing lasts forever, and with many stocks hitting a peak and the market looking agitated, there are growing rumors about when the next crash will come.
No one can know exactly what Wall Street will do in the next day, week, month or year. But this seems like a good time to at least be planning for the possibility of an economic slowdown and considering what stocks you may want to hold for defensive purposes if the market really falls.
Here’s why three fools believe Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), Ford Motor (NYSE: F), and General Dynamics (NYSE: GD) seem like good deeds to own during a recession.
Image source: Getty Images.
When the tide goes out, you’ll be happy to be swimming with the master
Lou Whiteman (Berkshire Hathaway): Warren Buffett’s Berkshire Hathaway underperformed the broader market in the past five years, leading some to wonder if the Omaha Oracle could have lost its fastball.
Berkshire added some technology stocks, including Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) to its holdings in recent years, but its portfolio was not designed to compete against the type of NASDAQ-powered technology rally we’ve seen. However, it is well configured to survive a slowdown, with wide exposure to a number of sectors that tend to remain even when the technology sector is sinking.
Berkshire Hathaway obtains a significant amount of its money from the insurance and utilities sectors, which are not particularly attractive in good times, but which do well in bad times due to their constant income streams. It also owns Burlington Northern Santa Fe, one of the two main freight railways serving the western United States.
The company’s stock portfolio contains a variety of value investments, including a basket of the country’s largest banks, Coke (NYSE: KO), and supermarket operator Kroger (NYSE: KR). Berkshire also has more than $ 140 billion in cash that it can put to work on buying assets should stock prices fall.
The end result is the best thing you can do to prepare for a recession is to buy a basket of quality companies and remember not to panic on sale when the bear comes up. Buying Berkshire offers this diversification, with the added benefit of firmly supervising the portfolio.
Buffett, in his 2004 letter to shareholders, compared the investment to swimming in the sea, saying “it is only when the tide is low that you find out who is swimming naked”. With Berkshire, don’t expect surprises.
One of the best stocks of 2009 could be great again if the market crashes
John Rosevear (Ford Motor): Ford and its longtime investors learned a lot from the major market crash of 2008 and early 2009. Among other things, Ford learned the value of having a large cash reserve that helped it continue the development of new products while rivals cut budgets – and investors learned (or relearned) that automakers’ shares with fresh produce tend to increase at the start of the economic recovery.
2020 was a tough year for the global auto industry, but Ford outperformed it in good shape. She contracted many new debts after closing her factories last spring because she remembered that lesson about having money in a crisis. But, as it turned out, Ford did not need the reserve: at the end of the year, the cash in hand exceeded the debt by almost $ 7 billion.
The F-150 pickup is Ford’s most profitable product. It is especially profitable when you have just received a complete update. Image source: Ford Motor.
Ford’s prospects for 2021 are very promising, with one caveat that we will address in a moment. The company is increasing inventories of its new F-150, its most profitable product (and a product that tends to be extra-profitable in its first year after a redesign). Ford has also started deliveries of the compact off-road Bronco Sport and the electric Mustang Mach-E, has the largest Bronco arriving in the middle of the year, and deliveries of the important commercial electric battery powered van (called e-Transit) will begin this autumn.
That warning? As a result of the high demand for new personal computers due to the needs of social distance, there is a global shortage of microchips – and these are also used in modern vehicles. This has led several global automakers, including Ford, to cut back on the production of key models. At the moment, it is not clear whether the shortage will decrease in a few weeks or if it can last for several months. It is something that automotive investors should observe.
Still, I think Ford will be a great move to keep if the market crashes this year. Yes, the stock price will drop for a while. But the automaker’s big cash treasury and strong product portfolio should help it recover (and a little more) ahead of the general market, just as it did in 2009 and 2010.
This defense stock has staying power … and firepower
Rich Smith (General Dynamics): Stock markets thrive and stock markets plummet. In good times and bad, though, I think you can rely on reasonably priced defense stocks to keep up reasonably well – which is why I would suggest investing in General Dynamics today.
What makes a defense action “reasonably priced?” I have long argued that natural valuation for these companies has historically been priced at their annual sales, and General Dynamics’ shares are trading close to that now. One of the cheapest defense stocks on the market, its price / sale ratio is now around 1.1. Compared to profits, their shares are sold for a slim figure of 13.8 times earnings. (Compare that to the 39 price / earnings ratio for the now overpriced S&P 500).
Of course, even the cheapest stock may not be a big bargain if it doesn’t have growth prospects. So how does General Dynamics compare in this regard?
Probably best known for its main battle tank M1 Abrams, General Dynamics has been strong in the defense industry for decades, but I really think the company’s other units could perform even better than its combat systems division, which is the one that manufactures the tanks.
Your aerospace business, for example, does not produce the fighters or bombers that you would expect from a defense contractor. It produces Gulfstream business jets, which may have become a little more attractive for executives fearing to fly commercial planes in the midst of a pandemic. And General Dynamics’s marine systems division (which does focus on military products) is perfectly positioned to benefit from the US Navy’s long-range plan to increase its battle fleet by more than 20% to 355 ships.
Supported by the growth of these two segments in particular, analysts predict that General Dynamics will increase its earnings by about 10% in each of the next three years. For a 13.8 P / E share paying a 2.9% dividend yield, that seems right to me.