Protecting the Portfolio Against Recession? Take a Hint From Autodesk's Guidance

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Getting worried about all these recession signals like the currently inverted yield curve? 

Well, the $30 billion Autodesk (ADSK) - Get Autodesk, Inc. Report just issued weak guidance, which is reflective of slowing economic growth, a theme that has caused bouts of sell-offs of risk assets in the past few weeks. 


Autodesk may have surpassed Wall Street's sales and earnings expectations for the second quarter of its fiscal year 2020, but management's guidance was weak. The company is looking for Annual recurring revenue (ARR) of between $3.425 billion and $3.485 Billion, a disappointment to analysts expectations of $3.49 billion.  Autodesk forecasted adjusted earnings per share for the year of $2.69 to $2.81. The midpoint is $2.75, lagging the consensus figure of $2.76. The stock fell 8.14% to $137.98 a share Wednesday. 

CEO Andrew Anagnost said on the company's earnings call "Our view of global economic conditions and their impact on our business has been updated to reflect the current state of various trade disputes and the geopolitical environment and their potential impact on our customers." He cited slowing manufacturing output in the EU, slowing growth in China as a result of its trade dispute with the U.S., and Brexit. Autdoesk sees a large portion of revenue from the EU and China. 

Analysts at Goldman Sachs and Morgan Stanley cited "macro uncertainty" as a reason to for caution on the stock, with Goldman lowering its price target to $175 from $185. 

Some may think of Autodesk as a software service company, which it is. But it sells those services to highly cyclical customers. Autodesk sees more than 60% of its revenue from customers in industrials and manufacturing, making it vulnerable to the reduced business investment that has come with the macro uncertainty, especially in the face of the tariff spat between the world's two largest economies.  

Broader Market's Behavior

In August, stocks have had bouts of sell-offs, with cyclical stocks feeling particular pain, as fears that a recession is coming sooner rather than later have intensified. Caterpillar (CAT) - Get Caterpillar Inc. Report , for example, a highly cyclical stock, is down 13.92% in the past month, significantly underperforming the S&P 500's small gain of 0.41% in that span. As bond prices have rallied and the yield curve has remained inverted in August, the Dow Jones Industrial Average has seen days that have featured 500 point or greater worth of downswings. 

The Lesson

Investors should parse through their portfolios to reduce exposure to cyclicality, if they think a recession is fast approaching. Even software companies like Autodesk can have exposure to cyclical spend. Many semiconductor stocks with high revenue and earnings exposure to data center spend, such as Intel (INTC) - Get Intel Corporation (INTC) Report , are at least somewhat cyclical. 

Caterpillar is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells CAT?

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