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Trash and dollar stores: Analysts are starting to give their top stocks to own in a recession

With the market selling off on fears of an imminent recession, individual stock analysts are starting to trot out their top stock picks to own in an economic downturn. A number of reports to clients of Wall Street banks this week focused on stocks that have resilient revenues and business models. Stocks fell deeper into bear market territory on Thursday as investors feared aggressive action against inflation by the Federal Reserve would result in a recession. On Wednesday, the central bank announced its largest rate hike since 1994. The Dow Jones Industrial Average dropped below the key 30,000 level on Thursday. On Wall Street, however, several stocks named this week — including Dollar General and Republic Services among others — were approved by analysts for their defensive characteristics amid a tough economic backdrop. Here are Wall Street’s favored recession beneficiaries: Republic Services Waste disposal company Republic Services could act as an hedge against inflation and as a safe haven during economic downturns, according to Deutsche Bank. Analyst Kyle White upgraded Republic Services to a buy from hold, saying in a Thursday note that the company has strong pricing power and defensive characteristics against an increasingly challenging economic backdrop. “We are upgrading Republic Services (RSG) to a Buy rating as it (i) is an inflation hedge in today’s environment, (ii) is a safe haven in market downturns and (iii) provides compelling earnings growth especially on a risk adjusted basis,” the note read. Deutsche Bank kept its $147 price target unchanged on the company. It is nearly 20% above where shares closed Wednesday. Dollar General The discount retailer is a defensive stock with “multiple ways” to outperform during a downturn, according to Morgan Stanley. Analyst Simeon Gutman upgraded shares of Dollar General to overweight, saying in a Thursday note that the “only scenario” where the company may underperform is if the economy rapidly recovers. “In a more prolonged downturn, DG should continue to outperform with material earnings and valuation upside. Even if the economy doesn’t enter a recession, the business is an earnings compounder,” the note read. “DG’s margin trajectory is more durable than we appreciated entering the year, and we anticipate a more difficult next 6-12 months for much of Retail given wallet share shifts.” Morgan Stanley raised its price target to $250 from $225. The new price target implies 7% upside from Wednesday’s closing price. Adient Margins for automotive seating company Adient could actually improve during a recession, according to Wells Fargo. Analyst Colin M. Langan reiterated an overweight rating on the stock, saying in a Thursday note that the company should meet its long-term target for margins bolstered by pent-up consumer demand after a meeting with the company’s management. “Interestingly, management sees the potential for margins to improve in a recession scenario as US volume could still increase given pent-up demand, inventory rebuild, overall production schedule volatility declines, and input/labor costs likely moderate,” Langan wrote. Wells Fargo has a $43 price target on the company. It implies nearly 33% upside from Wednesday’s closing price for the company. BioPharma Biopharma stocks could be part of the investor playbook for the second half of 2022, according to Morgan Stanley. Analyst Matthew Harrison said the sector outlook for small- and mid-cap biotech is improving as stocks price in interest rate hikes, and as recessionary concerns grow for the latter end of this year. “Importantly, we also believe we are near the SMIDcap bottom. We highlight three key reasons for our view (1) The SMID-cap draw down is now at ~50%, above the traditional market draw down of ~36% in a recession (Exhibit 2); (2) The sector, which historically underperforms by ~15% as rates rise, has already priced in a rising rate environment (Exhibit 3); and (3) SMID biotech actually starts to outperform the market in a recessionary environment,” the note read. Morgan Stanley said it’s focused on growth stories with defensive properties, and called out Argenx , Legend Biotech , Seagen , BioMarin Pharmaceutical , Eli Lilly , AbbVie and Royalty Pharma . Energy Energy is no exception to the stock sell-off in recent days, but Citi said some businesses in the sector are more likely to outperform during economic downturns. Analyst Scott Gruber reviewed a recession playbook for energy, saying in a Tuesday note that the firm prefers oilfield equipment and services (OFS) companies. “The historical playbook within Energy was to rotate toward the Majors during economic contractions,” read the note. “However, with supernormal commodity prices and refining margins, the defensive playbook may shift toward global OFS players.” Citi prefers Schlumberger NV , Baker Hughes , Oceaneering International , and ChampionX among global OFS names.

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