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Entering recession could mean more bad news for some beleaguered British shares.
However, I don't think everyone will be so affected. Two of those choices are BAE Systems (LSE: BA.) and Diploma (LSE: DPLM).
Here's why you'd buy some stocks the next time you have some cash to invest!
BAE Systems
BAE shares have risen 36% in a 12-month period, from 912p this time last year to current levels of 1,241p.
A major reason for this is continued geopolitical volatility, including the tragic wars in Ukraine and the Middle East. While I hope for a quick resolution on these fronts, there are still many things to like about the business.
Firstly, defense spending is at record highs, which should help BAE continue to deliver excellent performance and deliver profitability.
Next, BAE's customers are governments. This means long-term contracts that are not easy to cancel and therefore help provide stable income streams. For example, the company's order book reached a mammoth £66 billion last year!
From a bearish perspective, conflict resolution could mean reduced defense spending, hurting performance. However, defense spending covers more than weapons for war. Another problem is if a BAE product were to fail or malfunction. This could damage your reputation, finances, and sentiment.
However, BAE stock seems like a good option to me. They trade at a price-to-earnings ratio of 20, which is attractive for a blue-chip stock. Additionally, a 2.4% dividend yield would increase my passive income. However, I understand that dividends are never guaranteed.
Diploma
Diploma is a conglomerate of companies that provide industrial components to companies around the world. I understand that the companies Diploma sells to are in a cyclical sector. However, if you ask me, its profile, reach, long-term prospects and business model make it a good stock to buy despite the current economic outlook.
Like BAE, Diploma stock is on a roll. They have risen 22% over a 12-month period, from 2,248p this time last year to current levels of 3,448p.
Although manufacturing could slow during a recession, Diploma's modus operandi of selling critical components at cheap levels makes it an attractive prospect. These products keep machines and industries running. In addition to the company's footprint, it operates in fairly specialized industries, which can help it fend off larger competitors who may not want to enter that market if there isn't a strong enough justification.
From a bearish perspective, continued volatility could hurt the business at least in the short to medium term. Furthermore, is growth already priced in at a time when Diploma stock is trading at a P/E ratio of over 30? Negative news or trading could send stocks down.
Overall, I think the recession will not affect Diploma as it might seem. A fantastic track record of performance, cash generation and successful handling of previous recessions helps my investment case.
Finally, a dividend yield of 1.6% could grow in line with the business. However, I understand that past performance is not an indicator of the future and that dividends are not guaranteed.
