News & Press: National News

22 Big Companies Are In Recession; Do You Own Them?

Tuesday, July 16, 2019  
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Matt Krantz | Investor's Business Daily
July 16, 2019

It's strange to talk about recession as the stock market is hitting all-time highs and earnings season is heating up. But recession is here now for a number of large companies — like Western Digital (WDC) and Nvidia stock (NVDA) — a reminder why long-term investors need diversification.

There are 22 companies in the Standard & Poor's 500, also including Franklin Resources (BEN) and Macy's (M), already feeling the pains of contraction. Each of these companies posted lower earnings per share and revenue in each of the past two reported quarters. Revenue and earnings are seen falling in soon-to-be-reported second-quarter, too. This is according to an Investor's Business Daily analysis of data from Marketsmith and S&P Global Market Intelligence.

Don't worry. There are strategies to help.

The Oft-Predicted Recession That Didn't Come

Investors have braced for recession for years. Recession-watch hit a fever pitch in the fourth quarter of 2018. The S&P 500 dropped nearly 20% from the September 2018 high to the December low. At the time, investors figured the decadelong bull market had to end sooner or later. The economy would sputter. An economic recession is considered to be two quarters of contraction.

Both forecasts were wrong. Earnings season is kicking off this week. Analysts expect S&P 500 earnings to rise 1.9% during the quarter, says S&P Dow Jones Indices. It's the lowest earnings growth since the second-quarter of 2016, when earnings fell nearly 2%. It's down from 4% growth in the first quarter.

But it's far from a recession. Unless you owned these stocks.


Challenges For Asset Managers

One interesting paradox is that some companies that should benefit from the bull market and economic expansion aren't. Mutual fund and ETF operators are seeing contraction in their businesses. That includes Invesco (IVZ), Franklin Resources (BEN) and BlackRock (BLK).

Franklin operates a number of mutual funds for institutions, individuals and pension plans. The company collects a percentage of assets from the money it collects. Given that equity markets are up by $5.5 trillion this year, you'd expect profit to be higher, too. Instead, profit in the fourth quarter of 2018 fell 39%. It fell another 7% in the first quarter. Analysts forecast profit to fall 18% in the second quarter.

Intense pressure over fees is being felt all over the industry. Stock mutual fund fees dropped to 0.55% in 2018, says the Investment Company Institute. That's down by nearly half since 2000, when the fee was 0.99%.

Meanwhile, more competition keeps coming. Even JPMorganChase (JPM) is getting to the robo-advisor space with a low-cost offering.

Some firms like BlackRock may be better positioned, as it sells mainly through financial advisors. It also offers low-cost iShares ETFs. But even BlackRock is seeing a slowdown. Revenue fell 8% in the fourth quarter of 2018 and 7% in the first quarter of 2019. And revenue is seen dropping another 1% in the second quarter. The company reports July 19.

Tech Companies In Recession

Tech stocks are largely the fuel powering stocks to new highs. But it's mainly high-octane stocks like Microsoft (MSFT), Alphabet (GOOGL) and Netflix (NFLX).

That's why a few lagging techs standout. There's a whole host of tech firms, nine in the S&P 500 to be exact, already in earnings and profit recession. Western Digital (WDC) is a leader in an area of technology, hard disk drives, that is suffering from a slowdown in spending by major cloud storage providers, says CFRA. Earnings are expected to drop another 95% when the company reports on July 31. That's after falling 95% in the first quarter and 63% in the fourth. Rival Seagate (STX) is feeling similar pain.

But it's not just tech companies on the wrong side of trends, now. Nvidia makes graphics chips, one of the hottest areas of the industry. Earnings, though, are expected to fall 40% in the second quarter, which is being reported on August 15. That's after earnings fell more than 50% the past two quarters. Customers who operate data centers are taking a pause on orders for now.

Changing Consumer Demographics

Few industries are feeling the bite of the Internet like mall-based retailers like Macy's. While some retailers are opening stores, like dollar stores, Macy's is feeling the pinch.

Revenue has dropped in the low single digits each of the past two quarters. Analysts see revenue falling nearly 3% in the second quarter, reported on August 9. Analysts, meanwhile, see earnings falling 34% during the quarter.

Protect Yourself From Shrinking Companies

The fact this many big companies are contracting amid a rip-roaring stock market and economy is a warning. Eventually a recession will arrive. What should you do to prepare?

Long-term investors are wise to diversify in positions like the SPDR S&P 500 Trust (SPY). A broad position like this protects you from any individual stocks that suffer.

Consider low-volatility ETFs.
There are ETFs designed to mute market volatility. For instance, the iShares Edge MSCI Min Vol U.S.A. (USMV) looks to temper stock market swings by combining stocks that tend to offset each other. Another option is the Invesco S&P 500 Low Volatility ETF (SPLV), which owns the stocks with the lowest volatility. Garbage hauler, Republic Services (RSG), is a top holding. The company's earnings stability is a rock solid 5 (under 20 is highly stable).

Focus on growth.
Followers of CAN SLIM know current and annual growth is a key to winners. You'll want to note where the strength is. The IBD 50 and IBD Big Cap 20 lists help you find the large companies that aren't succumbing to earnings pressure.

S&P 500 Companies: Welcome To The Recession

Click here to view the big companies already in recession. Each posted lower earnings and revenue the past two quarters. Earnings and revenue is also expected to fall in their next reported quarter.

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