3 Beaten-Down Stocks to Buy if There Is a Recession

If you listen to comments from retailers and restaurant operators, it appears that many U.S. consumers are struggling. However, this isn't showing up in many economic indicators, as artificial intelligence (AI) spending and efficiency gains appear to be masking a lot of underlying problems with the U.S. economy.

While the U.S. economy isn't currently projected to enter a full-blown recession, higher pump prices from a broadening conflict in Iran could push consumers and the economy over the edge.

Let's look at three beaten-up consumer stocks that could outperform in this environment.

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1. Netflix

When consumers are feeling stretched and gas prices are high, they often look for cheap entertainment closer to home. That can be good news for Netflix (NASDAQ: NFLX), which remains the world's premier video streaming service. Its service is still relatively cheap compared to the value consumers get, and its push into ad-supported tiers is still early enough that any general pullback in advertising is unlikely to impact its growth.

While Netflix has become a more mature company, it is still seeing solid growth, with revenue climbing 13% last quarter and adjusted EPS rising 11%. The company still has solid growth opportunities ahead, both by adding new subscribers and by shifting more toward advertising through live events and lower-cost, ad-supported tiers.

The stock is off nearly 40% over the past year, which has brought its valuation down to a forward price-to-earnings ratio (P/E) of around 21 times analysts' 2026 estimates. This is a solid recession-resistant stock with still solid growth, trading at a reasonable valuation.

2. Walmart

Walmart (NASDAQ: WMT) stock has historically performed well during recessions, and investors can scoop up its shares at around 15% off from their highs. The company's scale and buying power allow it to offer the lowest prices, and during a tough consumer environment, it tends to benefit from the consumer trade-down effect. A large percentage of Walmart's sales are non-discretionary, and it has become the country's largest grocer.

Over the past few years, Walmart has done a really nice job of attracting more affluent shoppers. It's done this through a combination of convenience and high-end meat and produce offerings. Its $98-a-year Walmart+ membership, which includes free same-day delivery and other perks, has been a huge driver of attracting these customers.

While the company isn't completely immune to the impact of a recession, it tends to gain market share in such environments and continue to see steady growth.

3. Chewy

Chewy (NYSE: CHWY) shares have been hammered over the past year as the pet e-commerce company has been cautious about the consumer environment. But the fact remains that it is one of the most insulated retailers from a recession.

Nearly 85% of Chewy's sales come from customers on its autoship program and 67% of its sales last quarter were of consumables and 17% from pet healthcare products. While sales of treats and toys are feeling some pressure, pets still need to be fed and take medicine.

The company has also been doing a nice job of expanding its EBITDA margins through a combination of automation, AI, sponsored ads, pet medication, and private label. This is a generally low-margin business, so all the gross margin expansion and SG&A deleveraging it sees can have a big impact on its profitability. Expect this to be a driver for the stock over the long term.

Given the stock performance over the past year, Chewy now trades at a forward P/E of under 11.5 times next fiscal year's estimates. That's a huge bargain for a recession-resistant retailer that continues to grow its sales in the mid- to high-single digits and expand its margins.

Geoffrey Seiler has positions in Chewy. The Motley Fool has positions in and recommends Chewy, Netflix, and Walmart. The Motley Fool has a disclosure policy.