Entering a recession could spell further bad news for some beleaguered UK stocks.
However, I don’t think all will be impacted so badly. Two such picks are BAE Systems (LSE: BA.) and Diploma (LSE: DPLM).
Here’s why I’d buy some shares when I next have some investable cash!
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BAE Systems
BAE shares are up 36% over a 12-month period, from 912p at this time last year to current levels of 1,241p.
A big reason for this is continued geopolitical volatility including tragic wars in Ukraine and the Middle East. Although I’m hoping for a speedy resolution on these fronts, there’s still lots to like about the business.
Firstly, defence spending is at all-time highs, which should help BAE continue to record excellent performance and provide returns.
Next, BAE’s customers are governments. This means long-term contracts that aren’t easy to cancel and therefore helps provide stable revenue streams. For example, the firm’s order backlog stood at a mammoth £66bn last year!
From a bearish view, resolutions in conflicts could mean defence spending is scaled back, hurting performance. However, defence spending covers more than weapons for war. Another issue is if a BAE product were to fail or malfunction. This could hurt its reputation, finances, and sentiment.
However, BAE shares look like a good option to me. They trade on a price-to-earnings ratio of 20, which is attractive for a blue-chip stock. Plus, a dividend yield of 2.4% would boost my passive income. However, I understand dividends are never guaranteed.
Diploma
Diploma is a conglomerate of companies that provide industrial components to firms globally. I understand the businesses that Diploma sells to are in a cyclical sector. However, its profile, reach, long-term prospects, and business model make it a good stock to buy despite the current economic picture, if you ask me.
Like BAE, Diploma shares are on a good run. They’re up 22% over a 12-month period, from 2,248p at this time last year to current levels of 3,448p.
Although manufacturing could slow down during a recession, Diploma’s modus operandi of selling critical components at cheap levels make it an attractive prospect. These products keep machines and industries running. In addition to the firm’s footprint, it operates in rather niche industries, which can help it to fend off larger competitors who may not want to enter such a market if there isn’t a strong enough justification.
From a bearish view, continued volatility could hurt the business in the short to medium-term at least. Plus, is growth already priced in as Diploma shares trade on a price-to-earnings ratio of over 30? Negative news or trading could send the shares tumbling.
Overall I reckon Diploma won’t be impacted by the recession as much as it may appear. A fantastic track record of performance, cash generation, and successfully navigating previous recessions help my investment case.
Finally, a dividend yield of 1.6% could grow in line with the business. However, I do understand past performance is not an indicator of the future, and dividends aren’t guaranteed.
