3 Canadian Gems to Buy If There’s a Recession

Not all stocks suffer equally in an economic downturn! Here are 3 stocks to buy in a recession.

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Recessionary headwinds are blowing stronger. Here are three Canadian stocks to consider if there is a recession.

Fortis

Corporate earnings growth takes a hit during recessions, which ultimately weighs on stock performance. But some sectors and stocks see consistent earnings growth even during economic downturns. So, they are relatively more resilient in a recession. One such name is Fortis (TSX:FTS)(NYSE:FTS). Canada’s top utility has stayed relatively resilient in previous downturns and has outperformed broader markets.

Fortis caters to more than three million customers and derives earnings from regulated operations. Regulated operations earn stable returns in almost all kinds of economic cycles. This is because demand for utility services does not change much based on the state of the economy.

So, since the financial meltdown in 2008, Fortis has managed to grow its earnings by 5% compounded annually. This earnings predictability drives shareholder dividends. Thus, it has raised dividends for the last 49 consecutive years.     

However, FTS stock has declined 25% this year, underperforming peers. Given aggressive rate hikes and its valuation early this year, such a fall was justified. It currently offers a handsome yield of 4.5%. Due to its less volatile stock and stable dividend profile, FTS stock looks attractive in the current market.

Dollarama

Inflation hampers consumers’ spending and thus dents demand, ultimately taking down corporate profitability. However, in the case of Dollarama (TSX:DOL), its earnings and margins have so far been largely intact. That’s because the discount retailer’s value proposition becomes all the more valuable in an inflationary environment.

Dollarama is a less volatile stock and, thus, stands tall in volatile markets. Notably, it has thrashed broader markets with its outperformance in 2022. The stock has gained 35%, while TSX stocks have declined 14% this year.

And note that DOL stock has not only outperformed in the short term but over the long term as well. DOL stock has returned 700%, while the TSX Composite has returned a meagre 50% in the last decade. So, Dollarama has outperformed in bull as well as in bear markets.         

The discount retailer could see steady financial growth in an economic downturn, too. Dollarama’s globally diversified vendor base, extensive presence in Canada, and relatively lesser penetrated retail market will likely bode well for its long-term business growth.

Canadian Natural Resources

Energy producer names generally witness bigger value erosion amid recessions. However, this time it could be different. That’s because even if a downturn comes, oil and gas prices will likely remain strong, mainly due to the supply woes. So, Canada’s biggest oil and gas producer Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) could be a decent long-term bet.

CNQ stock currently yields 6% (including special), much higher than peer TSX energy stocks. Notably, be it faced with the COVID pandemic or 2008 financial crisis, CNQ kept its dividend growth streak intact for the last 22 consecutive years.

CNQ has had a remarkable year, returning 45% in 2022. Higher production in the strong price environment will likely boost its earnings growth.

The Canadian energy major’s balance sheet has substantially strengthened due to aggressive deleveraging. Given the earnings stability, balance sheet strength, and stable dividend profile, CNQ will likely outperform peers in the long term.    

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends CDN NATURAL RES and FORTIS INC. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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