Where to Park Your Cash and Find Recession-Resistant Stocks

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights.

The debate of whether we’re in a recession is still going. We’ll tell you about some recession-resistant stocks. Plus, Morningstar’s director of personal finance Christine Benz will share tips on where to park your cash to earn more. And a proposed rule could reshape the gig economy. Our analyst weighs in on how it could affect Uber, Lyft, and DoorDash. This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Stocks for a Recession The U.S. may or may not be in a recession, depending on how you look at a mix of economic indicators. Morningstar's U.S. economist Preston Caldwell doesn't think so. He says while a recession isn't here yet, growth is slowing. Given all the talk, investors may be thinking about adding some recession-resistant stocks to their portfolios. Companies with recession-resistant stocks offer products and services consumers continue to buy no matter the economic climate. They often have competitive advantages that allow them to maintain reliable cash flows over time. These companies share similar qualities like being relatively immune to economic cycles. They tend to have durable competitive advantages or economic moats. Those wide moats help strengthen their financial health and profitability, making them ideal during tough economic times. We are highlighting a list of 10 stocks that fit our definition of recession-resistant. Three of them are Anheuser-Busch InBev, Sanofi, and Dominion Energy. Check out the show notes to see the full list of 10 stocks for a recession.

Wells Fargo's Miss Wells Fargo missed the mark for third-quarter earnings due to volatile operating losses. The bank reported earnings per share of $0.85. That fell below Morningstar and other analysts' estimates. We think a bump in operating losses drove the dip in profits on an earnings-per-share basis. Wells Fargo is working through legal and regulatory issues. Operating losses aside, it was generally a strong quarter for the bank. Adjusted expenses would have come in below our estimate while net interest income and fees both outperformed our forecasts. The expense outlook will remain a key story for Wells Fargo as it works through its turnaround. We estimate its stock is worth $58 and believe it's cheap among our U.S. banking coverage.

Delta Soars in Q3

Delta Air Lines reported a strong third quarter, despite much higher fuel prices and a drop in capacity. Air travel demand remained strong, and Delta saw more international travel activity. In fact, international travel nearly reached 2019 levels with unit revenue growth exceeding the domestic market for the first time since before the pandemic. The debate continues over business travel’s rebound. The Atlanta-based airline says corporate sales weren't too far off from 2019 levels at the end of the third quarter. Corporate surveys show that most accounts plan to maintain or increase business travel during the fourth quarter. While operating costs remain elevated, strong pricing supported another quarter of solid profitability. Delta’s trend of double-digit operating margins could continue during the fourth quarter. Morningstar is keeping its 57-dollar estimate of what it thinks the stock is worth.

A proposed rule could shift some gig workers’ status from independent contractors to employees. The Biden administration is looking to replace rules from the Trump era. The Labor Department proposal has drawn attention to companies with ride-share or food delivery drivers.

Ali Mogharabi is a senior equity analyst for Morningstar Research Services. He covers the three companies we’re going to talk about: Uber, Lyft, and DoorDash.

Should gig workers be considered employees?

Hampton: Ali, the Labor Department proposal focuses on how workers should be classified. Some companies say gig workers like schedule flexibility and the pay opportunities, and others have argued that the gig economy leaves these workers without certain protections. How is this proposed rule fitting into the debate?

Ali Mogharabi: In terms of fitting into this debate, while the proposal now requires multiple factors to be considered to classify workers, those additional factors are also going to make it more difficult and debatable when trying to conclude whether someone is a contractor or an employee. This framework was a little bit different in what the Labor Department proposed at the end of the Donald Trump presidency, which was, while various factors should be taken into consideration, two of them should be the main ones, or more heavily weighted, when making the decision.

And those two were whether there's an opportunity for the worker to profit or lose money; and the degree of control that the business has over that worker. So if those two were met, then the other factors didn't need to be considered. But what's happening now is under the new proposal, all the factors have to be pretty much equally weighted when making a decision. When considering all those factors, I actually think it'll muddy the worker-classification process.

It creates difficulties for courts. It lengthens the overall legal process. As you can imagine, appeals from both sides become more likely, of course. And during such a lengthy process at the federal level, the companies could actually take advantage of opportunities to reach compromises with different states and/or actually get support from the voters.

Hampton: Well, you recently wrote about the proposal's main risk, and you pointed out that it comes down to who sets the prices. Can you explain that?

Mogharabi: Yes. In terms of the biggest risk, we do think it's price-setting, and that represents that, mainly because a contractor is usually able to set the price for his or her service. In the case of these platforms, it's the platform that sets the price. But those prices are based on various factors. For example, prices for rides are based on, of course, supply and demand. Also based on the current state of the traffic as it's related to the locations, weather conditions, the number of drivers already out there on that platform at that time, location of the nearest driver and so forth.

So all of this actually does benefit the driver, in our opinion. The matchmaking platform are the ones that are setting the price though. But various options are given to the drivers recently. So for example, Uber drivers do see how much they can make before accepting a ride, and of course they can choose not to take it.

They can also see multiple trip requests before accepting one. So more control and transparency is given to the drivers on that front. I think that the companies are moving more towards providing, again, more control and transparency to the drivers.

Hampton: Gig economy companies, their business model depends on independent contractors operating as freelancers. And it seems like if there's a change in how you classify workers, that it could affect the business model. How so?

Mogharabi: Yes, certainly. A change will affect the business model as the platform operators will have to provide additional benefits for the drivers or couriers, which certainly increases the cost of services for the platforms. They'll have to bear more of the possible liabilities in terms of accidents and other things. More costs related to the vehicles will be borne by the platforms.

And given those costs, a lot of it can be passed on to the consumers. So prices likely will surge, possibly actually lowering demand for usage of the platforms. You put all of that together, basically, you could see a lot of pressure on those companies' margins.

Now, on the driver's side, with all of what I just said, wages will decline, likely matching minimum wage levels, but without much upside for them. So yes, it impacts the model and doesn't necessarily benefit the drivers. And I got to say the most important part, the flexibility in terms of when to work or work for more than one platform, or which requests to accept and so forth, that flexibility will no longer be available for the drivers.

Hampton: And when this proposal dropped, a lot of attention went to three companies: Uber, Lyft, and DoorDash. What is their reaction to this?

Mogharabi: Overall, the companies have reacted pretty well. They were probably expecting such a proposal. But also, let's not forget that what the Labor Department wants right now or has proposed is not very different from what was there during the Obama administration, actually, and through the end of Trump's term. And of course, during that time all of those companies did pretty well.

I think they're all well prepared from a legal standpoint, if needed. And at the same time, they continue to have discussions at the muni and state levels, and as I mentioned before, to possibly reach compromise and/or to allow the voters to make a decision.

Our Analyst’s Views on Uber Stock, Lyft Stock, and DoorDash Stock

Hampton: What is your view of these stock companies' prices today?

Mogharabi: Yeah, I think all three stocks are attractive as they're trading at a big discount to my fair value estimates. Out of the three, I like Uber the most as it has actually built on its strong network effect moat source, and did that during the pandemic. Its business is a little bit more diversified as it provides not only mobility services, but also delivery, from which it's certainly benefited during the pandemic.

Its network effect also has helped it recover those drivers a little bit more quickly and at a lower cost than, for example, Lyft. And of course, from a profitability standpoint, it continues to progress as it now is generating positive adjusted EBIDTA and, of course, free cash flow. And we still expect it from a gap standpoint to reach profitability in 2024.

Hampton: All right, Ali. Thanks for your time and your insights today.

Mogharabi: Sure.

Hampton: You can earn a higher return on your safe money because of higher interest rates. However, there are some trade-offs to consider before deciding on where to park your cash. Here’s Morningstar’s director of personal finance Christine Benz and Morningstar’s director of content Susan Dziubinski.

How to Make Your Cash Work Harder as Interest Rates Rise

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Rising interest rates have taken a toll on the stock and bond markets this year, but there is a silver lining. Many savings vehicles now offer higher yields than they have in a long time. Joining me today to discuss the best places to park your cash as interest rates rise is Christine Benz. She's Morningstar's director of personal finance and retirement planning.

Good to see you, Christine. Thanks for being here.

Christine Benz: Hi Susan, it's great to be here.

Dziubinski: So, now before we get into the specifics of "OK, where people should be thinking about putting their safe investments," how much should people really have in cash these days? You know, that's sort of a big question. And this year, considering what we've seen in the stock and bond markets, maybe some people wish they had a little bit more in cash than they originally did.

Benz: Absolutely. And it's such a good question, Susan. It's important to not overdo cash savings mainly because, on an inflation-adjusted basis, this is dead money. So, you want to be careful, but I do like the idea of people thinking about life stage and using that to influence how much cash they hold. So, the old rule of thumb for people who are still working is to have an emergency cushion equal to three to six months' worth of living expenses. That's a good starting point, but I like the idea of fine-tuning it. So, for example, if you're the sole earner in your family, that's an argument for having a little more, maybe a little closer to a year's worth of liquid reserves. If you're an older worker—we know ageism is a thing. We know older adults sometimes are not able to continue working as long as they might have hoped. If you're a high-income worker, you'd probably want to have a little bit more of a cash cushion set aside because we know that higher-income workers often have narrower focuses for their jobs. It often takes longer to replace those positions. So I would think of those groups as having a little closer to a year's worth of liquid reserves, assuming they're still working.

For retirees, I've long been a fan of the Bucket approach where you've got one to two years' worth of portfolio withdrawals set aside in cash reserves. I like the idea of using your portfolio withdrawals as kind of a yard stick to drive how much to hold in each of the buckets. And so if you have that cash bucket, you would hold probably one to two years' worth of portfolio withdrawals, probably not a lot more than that.

Dziubinski: So, then let's talk a little bit about finding perhaps higher yields for your safe investments, and you think there are three key factors that investors really need to be thinking about when they're considering this. What are they?

Benz: Right. So yield, certainly it's hard to ignore yield and that's what we're all looking for and talking about. But you want to keep that in mind alongside liquidity. So oftentimes when you see higher yields, so for example, CDs are a great example of that—certificates of deposit—where the longer the CD term is, the higher the yield. Well, that's a liquidity constraint, right? If you can't tap into your funds for five years, that's a trade-off on the liquidity front. And then guarantees are another thing to keep in mind—that many cash-type instruments are indeed covered by FDIC protections. Money market mutual funds, on the other hand, they're a commonly held cash account—very safe in practical terms, but they are not covered by those FDIC guarantees. So, keep those three things on your dashboard: yield, liquidity, and guarantees.

Dziubinski: So, let's go through some of the specific ideas, starting maybe for the best options for people who are looking for yield but do need regular access to that money. What are some options for them?

Benz: My go-to for quite a while has been some sort of an online savings account. You can hop onto Bankrate and see what's on offer. You can see whether they have check-writing privileges, for example, and whether there's any minimum that you need to keep in the account. But right now it's not hard to find high-yield savings accounts that are paying out 3%, which is not bad for all that liquidity and FDIC guarantees.

Money market mutual funds have also started to look a little better after a long fallow period where yields really were barely in the black. We've started to see better yields there as well. As I mentioned, they're not FDIC-insured, so you want to keep that in mind if having that rock-solid guarantee is important to you. But we are starting to see those higher yields coming online in money market mutual funds, and typically there's very good liquidity there as well. You oftentimes have a checkbook that you can use alongside that money market mutual fund.

Hampton: Thanks to podcast producer Jake VanKersen who puts this show together. I’m thanking you for watching “Investing Insights.” I’m Ivanna Hampton, a senior multimedia editor at Morningstar. Take care.

Read about topics from this episode.

10 Stocks for a Recession

Risk of DOL’s Proposal and Reactions of Uber, Lyft, and DoorDash Stocks Exaggerated

Opportunities Seen in the Industrial Sector Amid Economic Headwinds

Looking Past Volatile Operating Losses, Wells Fargo Remains on Track in Q3

Best Financial-Services Companies to Own: 2022 Edition

3 Recession-Resistant Stocks

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