[Editor’s note: “Secular Growth Stocks Will Power Through a Recession” was previously published in July 2022. It has since been updated to include the most relevant information available.]
It increasingly looks like the U.S. economy is about to fall into a recession. That may sound like scary news. But luckily, we’ve compiled a portfolio of the top 10 growth stocks to buy to power through this incoming recession.
It’s become clear the U.S. economy is slowing and that a recession is almost inevitable. Home sales are falling. Manufacturing activity has dropped to a two-year low. Services activity has dropped to a five-month low, and jobless claims are on the rise. Moreover, Fed chair Jerome Powell’s current top priority is to kill inflation. And that’s even if it means pushing the economy into a recession.
Folks, a downturn is coming. Indeed, it certainly looks very likely. And it may already be here.
After the Fed fully committed to stamping out inflation, confidence rebounded. Then earlier this week, after the release of August’s hotter-than-expected CPI print, investors panicked. And the markets took a nosedive.
But despite the broader bloodbath, some growth stocks have soared amid the chaos!
Well, if a hawkish Fed tips the economy into a recession to kill inflation, they’re stocks that won’t succumb. Rather, they’ll power right through a recession.
These are companies that are so fundamentally strong that they’ll sustain huge revenue and earnings growth despite a slowing economy. In other words, they’ll keep growing while everything else shrinks.
Therefore, we’ve compiled a group of the top 10 growth stocks to buy to drive positive returns in a struggling market.
Let’s take a deeper look.
Economic Independence Is Key
For a moment, let’s recall how a stock price is derived. It’s calculated by taking the company’s underlying earnings (EPS) and attaching a multiple to them (price-to-earnings multiple).
In other words — EPS (x) P/E (=) Stock Price.
Therefore, we can understand how a recession impacts stock prices by understanding how it impacts these two values.
First, let’s talk about EPS. Corporate EPS has a direct correlation to GDP growth, as shown below. When GDP is rising, EPS rises. And when GDP is falling, so is EPS.
Recessions are defined by prolonged periods of negative GDP growth. Therefore, recessions are also characterized by negative EPS growth.
If we see a recession over the next 12 months, then that means most stocks will experience negative EPS growth. That will weigh on their stock prices, per the valuation calculus outlined above.
But not all stocks experience negative EPS growth during recessions.
Instead, some stocks are “economically independent.” That is, they’re powered by such powerful secular growth drivers that their growth trajectories are largely independent of the state of the economy. These companies can sustain positive EPS growth during recessions. And as a result, their stocks are not negatively impacted by falling EPS.
These are stocks you want to buy during recessions — secular growth stocks that can grow right through the storm.
Our Top 10 Stocks to Buy portfolio is full of nothing but these secular growth stocks. In fact, their average revenue growth rate is above 200%!
These are the fastest-growing companies in the world. And they’re well-positioned to expand right through the incoming recession.
Lower Yields Provide a Boost
Now, let’s talk about the other side of the valuation equation: the P/E multiple.
As seen below, the stocks’ P/E multiple is inversely correlated to bond yields — specifically, the 10-year Treasury yield. Typically, the higher the 10-year, the lower the P/E multiple. And the lower the 10-year, the higher the P/E multiple.
Recessions tend to pull yields down. In each of the past five U.S. recessions, the 10-year yield dropped more than 200 basis points. In some instances, it fell as much as 500. Typically, this is accompanied by P/E multiple expansion.
To that end, stocks actually get a small tailwind from economic recessions through multiple expansion. However, for the average stock, the magnitude of multiple expansion is much smaller than that of EPS declines. Therefore, the EPS decline far outweighs the multiple expansion, and stocks typically fall during recessions…
But not secular growth stocks.
Recall: Secular growth stocks don’t see EPS declines during recessions, so they’re only getting a boost from multiple expansion. Simultaneously, when yields collapse during a recession, they tend to see massive multiple expansion. That’s because secular growth stocks are long-duration assets that are particularly sensitive to yields.
In other words, secular growth stocks are the best stocks to buy to power through recessions. They can grow right through economic downturns and benefit in a big way from the lower yields that accompany recessions.
And our Top 10 Stocks to Buy portfolio represents the best secular growth stocks in the market. Consequently, it also represents the best stocks to buy today to power through a recession.
The Final Word on the Incoming Recession
Though August’s CPI was hotter than expected, it did show something important: Inflation is still cooling. Now the next few months of data will be crucial. If inflation reaccelerates (which we think is unlikely), the Fed will go full-throttle with rate hikes. And that’s at the risk of pushing the economy into a recession.
But before you go and hit the panic button, please understand one thing. During every recession, a certain group of stocks tends to outperform in a big way. And they make a lot of money for those prescient investors who buy them during economic downturns.
Those are secular growth stocks — stocks with such powerful growth drivers that they can grow right through an economic downturn.
And unsurprisingly, as recession fears have escalated, our Top 10 stocks portfolio is up 10% this week.
We think this is just the beginning of their flight, even while the rest of the market struggles. Investors will increasingly seek solace from the coming economic storm. And we think a lot of money will find shelter in our unstoppable secular growth stocks.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.