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Best stocks to buy now: These 5 names will weather the coronavirus pandemic

April 8, 2020, 10:00 AM UTC

This article is part of Fortune‘s quarterly investment guide for Q2 2020.

“It was good news” three months ago.

That’s how Saira Malik, head of global equities at Nuveen, and many portfolio managers like her, viewed it. But now, a recession is “pretty much a definite,” continues Malik.

In both the markets and economy, there’s been a “dramatic drop down that’s really been unprecedented from anything I’ve ever witnessed,” says Lori Keith, who manages the $4.7 billion Parnassus Mid Cap Fund. What a difference three months can make.

For a chunk of the first quarter, investors enjoyed a fairly optimistic picture: Consumer confidence and spending were strong, unemployment was fairly low, a trade war that had vexed many an investor in 2019 was resolving, and many stocks were booking their all-time highs (including several on Fortune’s list this quarter).

But as the coronavirus spread throughout China and the U.S., market malaise spread with it. In March, markets recorded their fastest decline into a bear market ever, dropping over 20% in just 16 trading sessions. Now, heading into the second quarter, the picture for investors is altogether dismal. And experts aren’t sugarcoating it.

The numbers are “going to be pretty ugly. Investors should be prepared to see that,” Malik warns.

Estimates on the Street vary, but some anticipate as much as a 30% decline in GDP in the second quarter, with millions of jobs lost, and negative EPS growth to finish the year. The question now on Wall Street’s lips? How long, and how bad.

Nuveen’s Malik; Dan Chung, the CEO and CIO of $24 billion Fred Alger Management advisory firm; and Parnassus’s Keith all believe recovery may be V-shaped or U-shaped (Every portfolio manager who spoke with Fortune for this article sees a technical recession, or decline in GDP for two consecutive quarters, in the coming months). But for Chung, now is the time for grit: “Investors should definitely hold tight, and frankly, I think they should be adding to their equity exposure right now.”

Those like Parnassus’s Keith see a “really rapid snap back and recovery” once cases diminish and restrictions are lifted. But in the meantime, she says, investors need to zero in on “maintaining exposure to those companies that have the ability to weather the downturn…[But] being positioned on that back side is really important.”

So, what’s the plan of attack? The key for stock investors now, say strategists: Look for companies with particular catalysts to not only weather the coronavirus environment but also accelerate growth on the other side. Many investors turn to dividend stocks in times of trouble for the additional income they provide through their yields. Fortune asked three top portfolio managers which dividend-paying stocks they’re using to bolster their portfolios—and which stocks have the potential to come out stronger in the wake of the crisis.

Republic Services (RSG, $75)

It may not be the sexiest stock on Fortune’s list: Republic Services is a waste disposal company. But don’t toss this stock in the trash—Parnassus’s Keith is bullish on the second-largest provider of waste services in the U.S. for the essential service it provides amid the pandemic. About 80% of Republic Services’ revenue is recurring, and the majority of that is secured through multiyear contracts, she notes, so “they have very strong visibility into their future earnings and cash flow” at a time when many big names don’t. The stock is trading down roughly 16% year to date, and is still off around 25% from its 52-week high in February. But with a 2.2% dividend yield (which Keith says should be able to grow over time), Republic Services is providing investors with a bit of extra income during these hard times. Plus, the company has a strong track record of surviving downturns: In 2009, Keith notes, the company generated “very strong” cash from operations of nearly $1.5 billion. The waste disposal provider has also been investing in innovation, technology, and its own operations to continue to drive earnings growth. That’s why Keith believes Republic Services has a “well-positioned and resilient business model to weather what happens in the next coming quarters.” Even at its trailing price-to-earnings of 22 times earnings, the company comes cheap against the industry average (27 times earnings).

Amazon (AMZN, $2,012)

For weeks, we’ve been stuck inside—some of us on our couches, some working from home, and, for many of us, adapting to ordering essentials online. Cue Amazon. This environment is “basically perfect” for Amazon, Nuveen’s Malik contends, because the possibility of some retailers closing permanently opens the door for Amazon to scoop up consumers for basic necessities and household products—with faster delivery thanks to the titan’s investment in its infrastructure over the past 18 months. However, that delivery has come at a price: in recent weeks, Amazon workers have hosted protests and walkouts over concerns that treatment and safety measures amid the health crisis have been insufficient.

Those issues notwithstanding, amid the onslaught of people working from home, Amazon is a “big winner” in the transition of computing and IT infrastructure from on-premises to cloud, says Malik. While the stock is one of the few that has managed to eke out in the green year-to-date (Alger’s Chung calls it “oddly defensive” right now and has added to positions in the stock), Amazon is still off over 7% from its 52-week highs in February—a rare dip for investors to pounce on. In fact, Chung thinks there’s no reason Amazon shouldn’t not only reclaim old highs, but go “well beyond that” in the coming year. Getting Amazon at a discount now could be a win for investors in the future: Malik believes there will be a “structural shift in the way people shop and think about shelter, even once the restrictions are lifted”—putting Amazon in an ideal spot to benefit.

Applied Materials (AMAT, $48)

With plenty of servers and computers surging online right now, it’s no wonder Alger’s Chung likes semiconductor materials provider Applied Materials. For one, the global leader in materials engineering solutions for semiconductor chips and electronics is a “beneficiary of all of this massive consumption of streaming, digital media, and also business work from home,” says Chung, as semiconductors are “the lifeblood of the technology industry.” There are only a few companies that can provide those like Nvidia and Intel with the equipment needed to manufacture semiconductors, and Applied Materials is coming surprisingly cheap right now. The stock, which pays a 1.9% dividend yield, is currently trading down some 29% from its all-time highs, around 15 times trailing earnings. Chung likes the stock now (and coming out of the coronavirus crisis) because it’s poised to capitalize on the trend of everything going to the cloud. Plus, says Chung, it’s likely “many companies will build in extra redundancy and capacity [for computing] after this,” with Applied Materials right there to ship equipment to help build the chips. That’s why he sees the stock showing an impressive rally in the coming months.

Cerner (CERN, $64)

Health care is under tremendous pressure during the coronavirus outbreak, and an upcoming election isn’t doing much to ease investor fears. But one smart play, Parnassus’s Keith says, is Cerner, an electronic health information supplier and provider of analytics, devices, and hardware. Now more than ever, Keith suggests, “there’s going to be a very strong need for maintaining upgrading [electronic health] records, but also analytics and other services.” With a “very wide moat,” and strong position alongside only one other main competitor, Epic Systems, Cerner is able to keep cash flowing with long-term contracts and a high cost for switching associated with its technology that entrenches it with customers. Case in point: Keith singles out the company’s recent multiyear, $10 billion deal with the U.S. Department of Veterans Affairs to create an integrated health record system for veterans. Plus, she likes Cerner’s ancillary analytics services that help “provide preventative as well as diagnostic treatment for doctors to be able to utilize.” Right now, the stock is down about 20% from its all-time high hit earlier this year, and although it currently trades over 29 times trailing earnings, the stock doles out a 1.1% dividend yield.

Booking Holdings (BKNG, $1,376)

If there were two obvious industries hurt immediately by the spread of coronavirus and travel bans, it’s hospitality and travel. As the industries are taking a beating, no stock is perhaps more exposed than Booking Holdings. The travel and hotel aggregator owns the likes of Priceline, OpenTable, Kayak, Rentalcars.com, and, of course, Booking.com—all feeling the pain of travel and dining grinding to a halt in recent weeks. But Nuveen’s Malik sees opportunity here: The company makes up about $100 billion of the $1.7 trillion in the online travel market, she notes, and is a strong partner for hotels (Booking has relationships with 460,000 hotels, motels, and resorts in over 230 countries), and at present valuations, the stock is a bargain. One plus for Booking versus a hotel or airline company: It doesn’t have the fixed costs—“They don’t own hotels, they don’t own cruise ships, they don’t own planes,” Malik says. Once restrictions are eventually lifted, she suggests, there will be a lot of pent-up demand for travel and dining, and consumers should flock to the site as restaurants and hotels rebound from the coronavirus shutdowns. (Plus, Malik points out, Booking has gone through periods of travel disruption before and “come out stronger”). Trading down nearly 33% year to date, Booking comes at a steep discount, and currently trades at a cheap 14 times earnings.

All stock prices calculated as of 04/07/2020.

More from Fortune’s Q2 investment guide:

5 rules to guide your investing decisions during the coronavirus pandemic
Market preview: What to remember as we move past a quarter to forget
—Chasing returns: Why ‘inside the tent’ assets like corporate debt may be poised to outperform
—Q&A: State Street’s Lori Heinel on where she sees beaten-down buying opportunities during coronavirus
—Why a bear market is the best time to ‘convert’ to a Roth IRA
The health of the economy in 7 charts
How to adjust your 401(k) during a bear market

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