Talk of a recession seems to dominate the market debate, with investors holding contrasting thoughts over when one will hit, how long it will last, and what the lingering aftershocks will bring. This can make it difficult for investors to prepare their portfolios for a potential downturn. Because of this, Morgan Stanley compiled a list of fortress stocks that could situate and protect investors’ portfolios for a pending recession. “With sufficient liquidity and solvency to run operations and service debt, these stocks should have better downside protection than average,” wrote strategist Todd Castagno in a note Tuesday. The screen featured Russell 1000 companies — excluding financials, real estate and utilities — with solid balance sheets and liquidity, that met the following criteria: Cash as a percentage of enterprise value greater than 2.5% Expected positive free cash flow growth over the next two years Return on invested capital expected in each of the next two years of more than 7.5%. A current assets over liabilities ratio greater than 1 Low leverage, with a debt-to-equity ratio of less than 2.5 This screen also includes companies with investment-grade credit ratings and excludes those with negative equity. Popular off-price retailer Ross Stores made Morgan Stanley’s list. Shares are up 2% this year following a near 20% rally this month on better-than-expected results. The stock ranked as the best performer in the S & P 500 for the trading week that ended Nov.18, when it surged 17% . It offers a cash-to-enterprise value of 11.3%, with free cash flows expected to grow just 1.6% next year, before jumping to nearly 31% the year after. Networking equipment and software company Cisco also met the criteria. Earlier this month, the company reported quarterly results that exceeded analysts and lifted its guidance for the fiscal 2023 year. The company’s free cash flows are forecasted to grow 20.9% next year and 11.1% the following year. On the tech front, Airbnb made the cut along with software company Zscaler . The stocks are off by 42% and 58%, respectively, this year, and offer cash as a percentage of enterprise value of 10% and 8.2%. A recent CNBC Pro screen found Zscaler among some of the Nasdaq 100 stocks that could lead tech higher going forward. Multiple semiconductor names were included in the screen, including Qualcomm , which offers cash as a percentage of enterprise value of 4.3%. The company is expected to grow free cash flows by 64% next year, but that’s forecasted to slow to just 17.4% the following year. Microsoft , Hoka-owner Deckers Outdoor , Merck and Johnson & Johnson also made the list. — CNBC’s Michael Bloom contributed reporting
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