Stocks to Buy During a Recession in Canada

Why Recessions Present Buying Opportunities

Let’s start by addressing why buying stocks during a recession isn't as counterintuitive as it sounds. Historically, recessions have led to significant dips in the stock market. Companies experience reduced revenues, layoffs become common, and consumer confidence drops. However, for long-term investors, this translates to buying opportunities. Stock prices fall, even for fundamentally strong companies that continue to generate cash flow.

Billionaire investor Warren Buffet’s famous advice, "Be fearful when others are greedy and be greedy when others are fearful," is especially relevant in these times. During a recession, investors panic and sell off their holdings, which often drives stock prices far below their actual value. For savvy investors, this is the time to enter the market.

Defensive Sectors to Target

During a recession, certain sectors tend to outperform others because they provide essential products or services that people continue to need, regardless of economic conditions. These are known as defensive sectors, and they include utilities, consumer staples, and healthcare. Let’s break these down:

• Utilities: Companies providing essential services like electricity, water, and natural gas are rarely impacted by a downturn. Everyone needs to keep the lights on, making utility stocks relatively safe.

  Example Stocks: Fortis Inc. (FTS), Emera Inc. (EMA)

• Consumer Staples: These are the companies that produce everyday goods like food, beverages, and household products. People still buy toothpaste, detergent, and canned goods, even when money is tight.

  Example Stocks: Metro Inc. (MRU), Loblaw Companies Ltd. (L)

• Healthcare: Whether it’s prescription medication or medical devices, the demand for healthcare doesn't drop during recessions. In fact, people may even prioritize healthcare spending more during economic uncertainty.

  Example Stocks: Bausch Health Companies Inc. (BHC), NorthWest Healthcare Properties REIT (NWH.UN)

Top Canadian Stocks to Buy During a Recession

1. Fortis Inc. (FTS)

   Fortis is one of the largest utility companies in Canada, providing electricity and gas to customers across North America. With over 49 years of consecutive dividend increases, Fortis is the epitome of stability. The company’s highly regulated business model ensures steady cash flow, making it an ideal stock to hold during economic downturns. Plus, the utility sector typically faces minimal impact from recessions as demand for energy remains constant.

2. Metro Inc. (MRU)

   This grocery and pharmacy retailer is a giant in Canada’s consumer staples sector. Metro has proven its resilience in past recessions and offers stability due to the non-discretionary nature of its products. Groceries and medication are essential purchases, regardless of economic conditions, making Metro a reliable defensive stock. In addition, Metro has a strong history of dividend growth, a feature that investors cherish during tough economic times.

3. Royal Bank of Canada (RY)

   While banks are generally considered sensitive to economic downturns, the Royal Bank of Canada (RBC) is a solid exception. As one of the largest and most diversified banks in the country, RBC has a strong balance sheet and a proven ability to weather financial storms. Its diversified business model, including wealth management and insurance, provides insulation from economic shocks. Historically, RBC has bounced back quickly from recessions, making it an attractive long-term investment.

4. BCE Inc. (BCE)

   BCE, Canada’s largest telecommunications company, offers another solid option during a recession. Telecommunications are considered essential services, and BCE benefits from steady revenue streams via its phone, internet, and media businesses. The company also pays a reliable dividend, which has historically attracted risk-averse investors during volatile market periods.

5. Canadian National Railway (CNR)

   Canadian National Railway operates an extensive rail network across Canada and the United States. While railways may seem vulnerable during economic downturns due to reduced freight volumes, CNR’s diversified business model, covering everything from grain to industrial products, provides some protection. Additionally, the company has a low debt-to-equity ratio, making it financially strong even when revenues temporarily dip.

6. Brookfield Asset Management (BAM.A)

   Brookfield specializes in infrastructure, renewable energy, and real estate investments. These sectors offer long-term, stable returns, particularly during times of economic uncertainty. The company has an impressive history of generating returns for shareholders, even during recessions. Furthermore, Brookfield's focus on renewable energy positions it to thrive in a world that’s rapidly transitioning to sustainable practices.

Key Considerations When Investing in a Recession

Now that we’ve highlighted some of the best stocks to buy during a recession, it’s essential to understand the underlying factors that make these picks smart choices:

• Strong Balance Sheets: Companies with minimal debt and healthy cash reserves are better equipped to weather economic storms. Before investing, ensure the company you’re considering has a strong balance sheet.

• Essential Products and Services: Look for businesses that provide goods or services that people need regardless of the economy's state. This reduces the risk of a significant drop in revenue during a recession.

• Reliable Dividends: Companies that pay dividends, especially those with a history of consistent increases, are usually better positioned to endure economic downturns. Dividends provide a cushion of steady income even when stock prices fluctuate.

The Psychology of Recession Investing

Investing during a recession requires a different mindset than investing during bull markets. It’s crucial to manage emotions like fear and uncertainty. Stock prices are likely to remain volatile, but staying disciplined and sticking to a long-term strategy is key. Many investors make the mistake of selling at the worst possible time, locking in losses instead of waiting for the eventual market recovery.

A recession can be a time of great opportunity, but only if you’re willing to take a contrarian approach. Avoid the herd mentality of selling off good assets just because others are doing so. Instead, look for opportunities to buy high-quality companies at a discount and hold them for the long term.

Using Exchange-Traded Funds (ETFs) as a Strategy

For those who prefer a more diversified approach, investing in ETFs focused on recession-resistant sectors can be a smart move. ETFs provide exposure to a wide range of companies, reducing the risk of investing in a single stock. Here are some ETFs worth considering during a recession:

• iShares S&P/TSX Capped Consumer Staples Index ETF (XST)

  This ETF provides exposure to Canada’s largest consumer staples companies, including Metro Inc., Loblaw, and Saputo. It’s a low-risk way to gain access to defensive stocks that perform well during economic downturns.

• BMO Low Volatility Canadian Equity ETF (ZLB)

  ZLB focuses on Canadian companies with lower volatility, offering more stable returns during uncertain times. This ETF includes stocks from sectors like utilities, consumer staples, and healthcare.

• iShares Global Infrastructure ETF (IGF)

  Infrastructure investments are typically resilient during recessions, as many infrastructure projects are government-backed and long-term. IGF offers exposure to global companies in the infrastructure sector, including those focused on renewable energy.

Looking Beyond Canadian Borders

While Canadian stocks offer excellent opportunities during recessions, investors shouldn’t limit themselves to the domestic market. Diversifying globally can provide additional protection. Sectors such as technology, which are often better represented in U.S. markets, can also be recession-proof to some extent.

For example, Alphabet (GOOGL) and Microsoft (MSFT) continue to generate revenue from essential digital services even during economic downturns. These companies' strong balance sheets and diversified revenue streams make them attractive picks during global recessions.

Final Thoughts on Buying Stocks During a Recession in Canada

Navigating the stock market during a recession can be challenging, but it doesn’t have to be scary. By focusing on sectors that provide essential services, identifying companies with strong financials, and considering the long-term outlook, investors can turn economic downturns into buying opportunities. Whether you prefer individual stocks or ETFs, the key is to stay calm, stick to a strategy, and focus on the fundamentals.

A recession may be a time of economic contraction, but for patient and disciplined investors, it can also be a time of significant financial growth.