A recession is almost assured, and maybe even a depression, according to some experts. Why? Inflation has been climbing rapidly in recent weeks, and the Federal Reserve is raising interest rates to combat it. As a result, the interest rates on two-year Treasury Bills and ten-year Treasury Bills are increasingly similar. When the two-year yield rises above the ten-year yield (a condition known as an “inversion of the yield curve”), it occasionally (though not always) predicts economic trouble ahead.
Don’t get too worked up. Take a look at your portfolio and make sure the firms you invest in are of high quality and have the ability to endure hard times. (It’s a good idea at any time, but especially now when economic growth is slowing.) T-Mobile US and Intuitive Surgical meet this description right now. Here’s why.
This telecom stock could slay stagflation, and might even benefit from it
Inflation is on the rise, and it’s showing no signs of slowing down, which might lead the Federal Reserve to raise rates. Both of these conditions may have a significant impact on the American consumer. What stocks would investors want to own if those pressures result in a recession?
Consumers, on the other hand, will continue to shop in store. However, if input costs rise, as they have been doing lately, this may put a damper on margins for those businesses unless they raise prices. Then there are also Walmarts and Costco Wholesales all around the world, which provide low-cost goods in huge quantities. These stocks, however, trade at very high multiples, so increasing interest rates might damage their equity value.
In a recession, I’d argue T-Mobile is the best bet in the market to withstand it and even profit. That’s because, for most consumers, mobile internet access is the last thing they’ll cut from their expenses.
T-Mobile is traditionally less expensive than its competition, and following its 2020 merger with Sprint, it boasts a two-year head start in 5G coverage. As more individuals acquire 5G handsets, it appears that T-Mobile’s coverage and pricing may enable it to perform exceptionally well as consumers seek for low-cost 5G alternatives.
T-Mobile is working to make it as easy as possible for app developers to use the 5G network, and the carrier believes that AI will be a key factor in its success. T-Mobile has been intentionally vague about exactly how much faster speeds will be with 5G than they are on 4G; nevertheless, the company promises that peak speeds will be at least 10 times faster than those found on existing mobile networks.
5G may be available in multiple forms, including mobile, and it could even provide a viable alternative to traditional fixed broadband. 5G might not just be accessible on smartphones. In many regions, 5G may also function as a new broadband technology. In fact, T-Mobile is now offering 5G fixed internet plans throughout the United States for $50 per month (with autopay). That’s far less than typical wired high-speed internet service.
Customers may be more willing to try T-Mobile’s 5G broadband at a lower cost if they look for ways to save money on their recurring monthly costs. And, if the service is good, this may provide T-Mobile with a large new market.
When it comes to concerns about pricing, T-Mobile appears expensive at a price/earnings ratio of 53, but the figures are misleading because the firm is still absorbing one-time merger expenses from the Sprint connection. Those expenditures, though, should be behind the company by the end of this year. Management expects free cash flow to increase from $5.6 billion last year to between $7.1 billion and $7.6 billion this year, reaching $13 billion to $14 billion in 2023. Assuming T-Mobile achieves those assumptions, the stock is trading at just 12 times projected free cash flow in 2023. As a result, T-Mobile does not have the same valuation concerns that many other higher-priced consumer-goods stocks do.
In my view, T-Mobile is a one-of-a-kind technology firm that should withstand a recession well.
Healthcare robots don’t care about recession
Intuitive Surgical is a world leader in robotic-assisted surgery. The FDA granted approval for the company’s da Vinci surgical robot in 2000. More than two decades later, expansion is still strong both in the United States and abroad.
As of late, I’ve become increasingly attracted to healthcare technology companies. That’s because, aside from those caused by a pandemic (total shutdown of the economy), cataclysmic events like world wars and recessions have little effect on healthcare in general.
Intuitive also has several benefits with its da Vinci surgery platform. Because of the high cost of the da Vinci machine, it’s incredibly “sticky” once it’s installed in a hospital or surgical center. Given the time investment required to set up a da Vinci robot, switching to another system becomes even less likely after the sale. Furthermore, Intuitive obtains recurring income from disposable instruments and support services after the sale.
Intuitive, regardless of the economy, I believe will continue to grow at a mid-teen percentage pace for some time. It’s also highly profitable. Last year, Intuitive generated free cash flow of $1.74 billion on revenue of $5.71 billion, with a free cash flow profit margin of 30%. In uncertain times, when growth and profitability are guaranteed, this combination is quite powerful. I think this stock will do well in the near future because of its steady growth and profitability during these trying times.
According to the company, a whopping one-third of all robotic procedures are now being performed with the da Vinci Surgical System. We’re talking about another year of double-digit percentage growth if you include the sale of new da Vinci systems. Intuitive also boasts an extremely clean balance sheet, with $8.62 billion in cash and equivalents and no debt. If stability is what you desire, few healthcare engineers are more stable than this one.