Right now, there’s a lot of talk about a recession. In the US, bond yields are signalling that the chances of one occurring in the near future are high.
This recession talk is having a negative impact on a lot of stocks, especially those more cyclical in nature, such as construction companies, miners and banks.
But not all stocks are falling. In some areas of the market, share prices are moving higher.
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Recession protection
In a recession, one sector that tends to outperform the broader market is consumer staples. Companies that operate in this sector produce goods that consumers can’t live without, such as food and beverages, personal care products and home care products.
Given they produce essentials that we all need and buy repeatedly, consumer staples companies tend to be relatively immune to economic slowdowns.
As a result, when economic uncertainty is elevated – like it is now – these ‘defensive’ companies often see their share prices rise as investors turn to them for safety.
Rising share prices
We’re seeing this play out at the moment. Just look at the share price of Unilever (LSE: ULVR), which owns a wide range of food, home care, and personal care brands including Knorr, Domestos, and Dove.
Last week, its share price hit its highest level since mid-2021. Over a month the stock is up 6%, while over a year it’s up 22% (versus 1% for the FTSE 100).
Another example of a consumer staples stock with positive share price momentum right now is Reckitt (LSE: RKT), which owns a wide range of health, hygiene and nutrition brands, including Dettol, Durex, and Strepsils.
Over a month it’s up 8%, while over a year it’s up 5%.
Worth buying today?
Are these two defensive stocks worth buying right now?
In my view, yes. Both companies expect to achieve sales growth in 2023. Unilever has provided guidance of 3-5% top-line growth for the year, while Reckitt has said it expects mid-single digit like-for-like revenue growth.
Meanwhile, both trade at reasonable valuations. Currently, Unilever has a price-to-earnings (P/E) ratio of 19, while Reckitt has a P/E ratio of 18.4.
Yes, these ratios are higher than the market average, but I think these companies are worth a premium to the market, given their bullet-proof nature.
Finally, both pay decent dividends. At present, Unilever has a yield of around 3.6%, while Reckitt’s yield is 3%.
Of course, there’s no guarantee they will continue to outperform the market. There are still things that could go wrong here near term. For example, costs could rocket putting pressure on profits.
Overall though, I see a lot of appeal in these consumer staples stocks right now. I own both and plan to buy more in the near future in order to hedge my portfolio against recession risks.
