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A slowdown in economic growth is almost certain, and maybe, just maybe, even a recession is on the way. Why? Inflation is running hot, and the U.S. Federal Reserve is raising interest rates to combat it. As a result, the interest rates on two-year and 10-year Treasury Bills are nearly the same. If the two-year yield goes higher — a phenomenon known as the “yield curve inversion” — it sometimes (though certainly not always) predicts a recession.
Don’t panic. Instead, take stock of what’s in your portfolio, and make sure the companies you own are high-quality with the means to survive some hardship. (It’s a good practice at any time, but especially if slowing economic growth is coming.) Right now, three Fool.com contributors think T-Mobile US ( TMUS 0.62% ), Intuitive Surgical ( ISRG -0.46% ), and Fiverr International ( FVRR 6.00% ) fit that description. Here’s why.
Data source: Getty Images.
Billy Duberstein (T-Mobile US): Inflation is high and shows no signs of materially slowing, which could force the Federal Reserve to raise rates. Both of these factors could pinch the U.S. consumer in a big way. If that pressure leads to recession, what stocks would investors want to be in?
Well, there are consumer staples, which consumers buy in good times and bad, but the rise of input costs could put a damper on margins for those companies unless they raise prices. Then there are also the Walmarts and Costco Wholesales of the world, which offer low-priced items in bulk, along with cheap private labels. However, these stocks trade at very high multiples, so rising interest rates may hurt their valuations.
I’d argue telecom giant T-Mobile may be the best bet in the market to weather a recession and even benefit from it. That’s because T-Mobile offers low-cost mobile plans, and for most people, the mobile internet is the last thing they will cut from their budgets.
Not only is T-Mobile traditionally lower-priced than competitors, but it has a two-year lead over the competition in 5G coverage, following its 2020 merger with Sprint. As more and more people get 5G phones, it seems T-Mobile’s coverage and costs could allow it to win big as consumers look for low-cost 5G options.
T-Mobile is also trying to facilitate new 5G “killer apps,” as it just unveiled T-Mobile DevEdge, a new developer platform meant to make developing on its 5G network quick and easy. At its March 23 5G event, T-Mobile also announced partnerships with Red Bull and Walt Disney to create immersive 5G experiences.
And 5G may not just be a mobile experience. In many areas, 5G could also be a viable new broadband technology. In fact, T-Mobile is just now rolling out 5G fixed broadband plans across the U.S., at a monthly price of just $50 (with autopay). That’s well below the price of traditional wired broadband.
If customers look to pinch pennies on their recurring monthly expenses, more may be willing to try T-Mobile’s 5G broadband at a lower cost. And if the product works well, this could be a huge new market for the company.
As for valuation concerns: While T-Mobile may look expensive at 53 times trailing earnings, those earnings are misleading, since the company is still taking on one-time merger costs from the Sprint integration. However, those should be behind the company in the second half of this year. Management sees free cash flow rising from $5.6 billion last year to between $7.1 billion and $7.6 billion this year, on the way to $13 billion to $14 billion in 2023. Assuming T-Mobile meets those projections, the stock is only trading around 12 times 2023 free cash flow. So T-Mobile doesn’t have the valuation concerns that many other higher-priced consumer-staples stocks do.
All in all, T-Mobile looks like a rare tech stock that should also hold up well in a recession, making it buyable today.
Nicholas Rossolillo (Intuitive Surgical): Intuitive Surgical is a leader in robotic-assisted surgery. Its da Vinci surgical robot got approval from the U.S. Food and Drug Administration all the way back in 2000. More than two decades later, growth is still going strong — both here in the U.S. and overseas.
I’ve found myself increasingly drawn to healthcare technology stocks as of late. That’s because healthcare overall is quite resilient to recessions (aside from those brought on by a pandemic, total lockdown of the economy, and temporary shutdown of elective surgeries).
Additionally, Intuitive has key advantages with its da Vinci surgery platform. Once it gets a system installed in a hospital or surgery center, it’s incredibly “sticky,” because of the hefty price tag for the da Vinci machine. Once a surgery team is trained how to use a da Vinci robot, switching to a rival system becomes even less likely, given the time investment needed to get up and running. And after the sale, Intuitive earns recurring revenue from disposable instruments and support services.
Thus, recession or not, I think Intuitive will continue to chug along at a mid-teens percentage revenue growth rate for quite some time. It’s also incredibly profitable. The company generated free cash flow of $1.74 billion last year on revenue of $5.71 billion, a free cash flow profit margin of 30%. Steady growth and profitability is a potent combination in times of uncertainty, and I think that will serve this stock well for the foreseeable future.
Management expects the number of procedures performed with a da Vinci robot to grow 11% to 15% this year. Add in the sale of new da Vinci systems, and we’re looking at yet another year of double-digit percentage growth. Intuitive also has a squeaky-clean balance sheet, with $8.62 billion in cash and equivalents and no debt. If stability is what you’re looking for, few healthcare technologists are more stable than this one.
Anders Bylund (Fiverr): You don’t have to root for a market meltdown when you invest in stocks that should do well in any type of market. That’s what I see in freelancing-marketplace operator Fiverr International.
First and foremost, Fiverr’s business is on a roll. Annual sales quadrupled over the last three years. Every year since the company started publishing financial data, both the number of active buyers on the Fiverr platform and the average yearly spending per buyer have increased by double-digit percentages. And the opportunity to continue this rocket ride is enormous. The company posted $298 million in top-line sales last year, and the addressable market is estimated to be worth more than $100 billion in annual freelance service revenue — just in the United States.
On top of that fundamental strength, I expect Fiverr to benefit from future slowdowns in the domestic and global economic systems. The so-called gig economy is already disrupting the traditional job market, and that revolution should only accelerate when workers find themselves with slim pocketbooks and extra time on their hands.
And Wall Street’s market makers have jumped to the conclusion that Fiverr absolutely depends on a weak economy: Share prices have fallen 64% over the last year. The pessimistic vibe is still strong, as nearly 16% of Fiverr’s shares are on loan to short-sellers. Yet the company is in the habit of crushing analyst estimates and following up with bullish guidance targets.
The mismatch between Fiverr’s high performance and the Street’s low expectations looks like a wide-open buying window to me, and the invitation is even more obvious if you expect an economic slowdown in the near future.
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