The signs are everywhere, and now the stock market, which has traded sideways for the past year and a half, is looking somewhat vulnerable. The culprit? The potential for the first recession in years. A recession is a macroeconomic term that refers to a significant decline in general economic activity in a region, country or the entire world that goes on for more than a few months.
A true recession is typically visible in industrial production, employment, real income and wholesale-retail trade. The technical definition of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product.
While we are a long way from two quarters of negative economic growth, the signs are increasing and becoming more ominous.
- The inversion in the Treasury yield curve has many people saying the bond market is anticipating a recession.
- The transports have been mauled, and freight shipments have been in a steep decline.
- The small-cap stocks have been hammered, as typically they depend on a robust U.S. economy. Along with the transports relative to the S&P 500, both are at the lowest level since 2009.
- Weak numbers from the Dallas Federal Reserve this week were a warning sign as well, as the Texas economy is considered one of the strongest in the nation.
- Consumer confidence plunged to 121.5 in June from 131.3 in May, reaching the lowest reading since Sept. 2017.
- The broad market multiples on a forward earnings basis for the rest of 2019 are way above historical norms and are also flashing a warning sign.
- Gold has rallied to the highest levels in six years.
All this negative data comes when the overall market has had the best June since 1938, and there is a possibility that President Trump and Chinese President Xi could come to some agreement at the G-20 meeting in Osaka, Japan, this weekend. In addition, Federal Reserve Chair Powell has all but signaled that the Fed is poised to lower interest rates, and many think he will in July.
We found five stocks rated Buy at Merrill Lynch that make good sense for dangerous waters.
Agnico Eagle Mines
This is one of Wall Street’s most preferred U.S. gold producers. Agnico Eagle Mines Ltd. (NYSE: AEM) is a senior Canadian gold mining company that has produced precious metals since 1957. Its eight mines are located in Canada, Finland and Mexico, with exploration and development activities in each of these regions, as well as in the United States and Sweden.
The company and its shareholders have full exposure to gold prices due to its long-standing policy of no forward gold sales. Agnico Eagle has declared a cash dividend every year since 1983.
The Merrill team loves the stock and noted this recently:
Agnico Eagle reported that its Meliadine mine achieved commercial output in mid May 2019 ahead of schedule and under budget. Agnico Eagle has a plethora of catalysts in 2019 such as Amaruq reaching commercial output in the third quarter and moving to free-cash-flow in the third quarter. The achievement of the catalysts could lead to an upward revaluation in the company’s valuation multiple.
Shareholders receive a 1.03% dividend. Merrill Lynch has a $53 price target, while the consensus target is $51.40. The stock closed at $51.10 on Wednesday.
Altria
This maker of tobacco products offers value investors a great entry point now, and it took a hit recently as cigarette sales have slowed. Altria Group Inc. (NYSE: MO) is the parent company of Philip Morris USA (cigarettes), UST (smokeless), John Middleton (cigars), Ste. Michelle Wine Estates and Philip Morris Capital. PMUSA enjoys a 51% share of the U.S. cigarette market, led by its top cigarette brand Marlboro, one of the most valuable brands in the world.
Altria also owns over 10% of Anheuser-Busch InBev, the world’s largest brewer. In March 2008, it spun off its international cigarette business to shareholders. In December 2018, the company acquired 35% of Juul Labs.
Altria also had a mixed bag of first-quarter results, and the stock has been weak recently, offering a great entry point. Merrill noted this about the results:
Net sales for the quarter totaled $3.9 billion, -$237 million versus our forecast and led by weaker than anticipated cigarette volumes. Altria management reaffirmed its guidance for 2019 EPS to be in a range of $4.15 to $4.27 (unchanged) despite higher fuel prices.
Shareholders receive a 6.56% dividend. The $66 Merrill price target compares to the $58.73 consensus estimate. Shares last traded at $47.94.
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