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Stocks To Avoid In A Recession

While the president reliably takes victory laps for the economy, that doesn’t keep the fear, likelihood and debate about when the next recession will arrive out of the market’s chatter.  

Truth be told there’s no magic in predicting the ultimate arrival of a recession. There’s always one around the bend. What’s tricky is predicting when. Three out of 4 economists predict a U.S. recession by 2021 according to National Association for Business Economics. And the same group reports 34% of economists expect one in 2020. When it arrives, here’s five stocks you don’t want to own. In four out of five cases debt is the big red flag. To be fair, there’s plenty of companies you might not want to own in a recession, but among the S&P 500, these stuck out. 

Molson Coors sales are flat, and nothing about a beer company should be flat. Worse, debt is growing. As part of the acquisition of MillerCoors in parts during 2015 and 2016, debt ballooned to nearly $12 billion from $2.6 billion. Since then management has done good job whittling down the total to about $8.6 billion.  

Further, Molson Coors challenges seem to be structural. The company’s market share, has slimmed from 27% in 2014 to 24% last year. Arch competitor Anheuser-Busch InBev, isn’t faring much better and saw its share shrank from 46% in 2014 to 42% in 2018. These figures according to Molson Coors most recent 10-K. But Molson Coors is stubbornly focused on premium light category with Coors Light, Miller Lite and Miller Genuine Draft which it says account for a majority of its volumes. These brands, the company says, “are aligned with global priority brands and account for the majority of our volumes.” But it seems consumers are increasingly turning to craft beers whose entrants appear to be limitless and delivering, if not death, then certainly injury by a thousand cuts.

In the days or yore, beer was considered recession proof. But that was before massive consolidation and the industry’s fundamentals were turned on their ear. If a recession comes, by all means pick up a case of Coors Light to ease your troubled mind, but don’t pick up the stock.  

Sprint.  It’s hard to know which outcome is more terrifying: Sprint completing its merger with T-Mobile or failing to complete its merger with T-Mobile.  

If the deal goes through, the combined entity’s revenues will still be are less than half of AT&T’s and less than two thirds of Verizon’s. Net net, a Sprint T-Mobile combination will be competing with two 800 pound Gorillas. 

And while the Justice Department gave the transaction its green light, it’s not a done deal. Eighteen state attorneys general are suing to block the marriage, with a trial set for Dec. 9.

If the merger fails to materialize, the impact could be even more perilous. On revenues, Sprint would be dead-last in a four-person race. A stand alone Sprint might be compelling as an investment if the top and bottom lines were moving in the right direction, but they aren’t. For Sprint’s quarter ended June 30, revenues slipped 3.5% to $8.1 billion, and the company swung to a net loss. Forward-looking estimates give pause too: analysts are expecting a 2.1% revenue decline and a loss of 10 cents per share, down from a penny gain in the previous fiscal year.

Perhaps a recession would push consumers into the arms of Sprint’s more budget oriented plans. But AT&T and Verizon are not afraid to compete on price and sport a hefty dividend that Sprint simply doesn’t have.  

At approximately 6.6%, CenturyLink has a huge dividend, but not because earnings and cashflow have been growing. Rather the share price has been falling. And as the old saw goes on Wall Street, cheap stocks are cheap for a reason.  CenturyLink cut its dividend in February from 54 cents per quarter to 25 cents. It looks like CenturyLink could cover this its $0.54 dividend, but it is also managing a massive debt load of $34 billion from the 2017 acquisition of Level 3 communications.  

Level 3 was supposed to “significantly improve our global network capabilities, creating a company with one of the most robust fiber networks in the world.” However, growth has stalled. Operating revenues for the first half of 2019 have declined 5% year-over-year, though to CenturyLink’s credit, profits climbed from $407 million in 2018 to $717 million, excluding the effect of about $6.5 billion in goodwill impairment.

A massive debt load and stagnant growth amid an economic expansion is problematic. Moreover, the company’s consumer business is under strategic review, a process which CEO Jeff Storey said will be complex, indicating that the path forward is anything but clear. So while the nearly 7% yield sounds nice CenturyLink doesn’t look like a reliable dividend play, or perhaps any kind of play in a recession.

Consumer staples such as Campbell’s Soup tend to be popular recession plays. After all with a can of Campbell’s infamous tomato soup costing just $0.98 at Wal-Mart, they’re likely to fly off the shelf during a recession. But Campbell’s is a much more complicated story than soup and shows some vulnerabilities that would not put it at the top of your shopping list during a recession.  

The balance sheet is one issue. Campbell Soup has about $7.1 billion in long-term debt versus equity of about $1.1 billion, resulting for a whopping debt-to-equity ratio of about 7x, which is several times higher than the average S&P 500 consumer staples company. 

Most of this debt came from the acquisition of snack food company Snyder’s-Lance which has added growth, but organic growth in Campbell’s legacy businesses, such as meals, beverages, biscuits and snacks, are falling.

Campbell’s issues have attracted activist hedge fund Third Point, which advocated for the sale of Garden Fresh Gourmet brand earlier this year, as well as sales of other noncore businesses. Sure, strategically trimming assets makes sense, but growing a business by shrinking it is a difficult game to play.  

Chief executive Mark Clouse was installed in January 2019, and CFO Mick Beekhuizen started at the end of September. Both executives came from outside the company Campbell’s has a premier brand and a storied history. But it also has some struggling brands, uncertain growth prospects, a levered balance sheet and an untested senior management team, generally not the elements of share appreciation amid the turmoil of a recession.  

Everybody eats, and while that’s a good starting point for a profitable business, getting there is much, much harder. That’s the case right now with General Mills – purveyor of brands such as Cheerios, Pillsbury, Betty Crocker, Häagen-Dazs among others – which has had trouble generating much growth. Projected fiscal 2020 sales of $17.35 billion would represent 2.9% year-over-year growth from FY19, but that’s still lower than revenues from five years ago.  Goldman Sachs analyst Jason English, who downgraded GIS to a sell summed up the situation noting General Mills was experiencing “mounting deceleration.”

Achieving growth going forward will be a tall order for General Mills because about 60% of its sales occur in North America, which has become a difficult market. North American revenues declined 2% in its most recent fiscal year, on top of a nearly 1% the year prior.

High points appear to be General Mills convenience-store segment and the recently acquired pet food business. The latter saw net sales and operating profits both grow 11% year-over-year. But those two segments, combined, account for just ~20% of sales and perhaps not quite enough to drag the other 80% of the company forward.

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