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5 Top Defensive Stocks to Fight Market Uncertainty
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Jobs growth lost momentum in November and the drop in unemployment rate did not herald in good news as it stemmed from a decline in labor force participation. The economy thus remains on tenterhooks. The major indices, in the meantime, gyrated this month as tech stocks bleed. President-elect Donald Trump’s policy changes and protectionism, along with a stronger dollar may pose concerns for companies having significant international exposure. Though Trump’s market-friendly policies have worked wonders for a slew of sectors, it is also turning the broader market into one giant bubble, raising possibilities of disenchantment for investors in the near term.
Outside the U.S., a resounding “no” vote in Sunday’s Italian referendum has kept investors on high alert. Given the turbulence, investing in defensive companies seems prudent. Such stocks provide consistent dividend and steady earnings regardless of the state of the global equity market.
Jobs Report Suggests Moderation in Growth
The November jobs report showed fewer-than-expected job additions, while the count over the prior two months has been trimmed. The U.S. economy added 178,000 jobs in November, less than analysts’ expectations of 180,000 to 200,000. Year-on-year employment growth has declined 7 basis points from 1.65% to 1.58%. The payroll count, in the meantime, was revised lower by a cumulative 2,000 over the last two months. While Professional & business services, construction and health care added jobs, all other industries showed no considerable addition.
Meanwhile, the unemployment rate fell to 4.6%, marking a 9-year low. But, the decline is largely because of the fall in participating rate. The big drop in the unemployed rate was the result of the 226,000 decline in civilian labor force. The participation rate decreased to 62.7% last month from 62.8%. It is now near the lowest since 1978. The news on wages was also discouraging. Average hourly earnings fell by 0.1% in November to $25.89 after a 0.4% rise in the prior month. This marks the first decline since Dec 2014.
Tech Tumbles on Fear of Trump Effect
The tech-heavy Nasdaq, which has lately been impacted by weakness in technology, fell 2.7% last week, its worst decline since the election on Nov 8. Among other major indices, the S&P 500 lost 1%, while the Russell 2000 index of small-cap stocks, which has been one of the biggest gainers post the election, fell 2.2% over the same time frame.
Trump’s tax reforms aren’t favoring the tech sector much. He is in favor of lowering corporate tax rate from 35% to 15%. This might be great news for some sectors, but not for techs at all. The tech sector’s current tax rate averages around 20%, which suggests that it earnings will receive a lesser boost compared to sectors with notably higher tax rates.
Tech behemoths often stash a lot of cash overseas. Among such companies with huge offshore cash balances are Apple Inc. (AAPL - Free Report) at $216 billion, Microsoft Corporation (MSFT - Free Report) at $111 billion, Cisco Systems, Inc. (CSCO - Free Report) at $60 billion and QUALCOMM Incorporated (QCOM - Free Report) at $29 billion. Trump’s policy that corporates will get a chance to repatriate foreign profits at a rate of 10% should benefit these tech stocks, but, his call for tariffs on goods manufactured overseas could make products pricey, eventually affecting revenues. Trump, on a personal level, doesn’t share a good rapport with several tech powerhouses including Amazon.com, Inc. (AMZN - Free Report) whose CEO Jeff Bezos was accused of evading corporate taxes (read more: 4 Hot Picks While Technology Feels December Freeze).
Substantial international exposure has also made major tech companies vulnerable, thanks to a stronger dollar. The rising dollar will deny revenues of multinational companies that rely heavily on profits from overseas.
Trump’s Rally a Bubble?
Trump’s market-friendly policies, however, helped major indices scale to all-time highs in November. However, this warns us that the market might be approaching the overbought region which will either be corrected by going sideways or lower.
According to Ed Yardeni, chief investment strategist at Yardeni Research Inc., the S&P 500’s forward price-to-earnings ratio climbed to 16.9 multiples last week from 16.4 multiples on Nov 8. When it comes to small-cap stocks, the ratio for the small-cap S&P 600 surged to 19.9 from 17.4 in the same period. These valuation levels are difficult to sustain unless the U.S. economy expands to 4% from the current level of about 3%.
Voters Reject Renzi in Referendum
On the international front, a stinging defeat of Italian Prime Minister Matteo Renzi dragged U.S. equity index futures down on Dec 4, while the euro touched a 20-month low. He said that he will resign following a referendum over his proposals for constitutional reforms. Exit polls and early projections indicated that he had lost the referendum by a wide margin.
Italian voters rejected the proposals aimed at ending a political gridlock and reviving Italy’s stagnant economy. This means that investors now view the country to be Eurozone’s biggest risk. Italy might be driven out of the Eurozone which could spark a banking crisis.
5 Defensive Stocks to the Rescue
As the markets seem to be plagued with widespread uncertainty including stretched valuations, defensive stocks seem to be the safest investment option. Such stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with the activities in the larger market. Their products are in constant demand irrespective of market volatility and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as not many people will be willing to live without electricity, gas and water. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaffected during economic downturns. We have, thus, selected five solid stocks from the aforementioned defensive sectors that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
SCANA Corporation : This distributor and seller of electricity to retail and wholesale customers has a Zacks Rank #2 and a VGM score of ‘B’. The company’s estimated growth rate for this year is 11.4%, in contrast to the industry’s projected negative return. The Zacks Consensus Estimate for its current year earnings increased 4% over the last 60 days. The company offers a dividend of 3.24%.
Southwest Gas Corporation (SWX - Free Report) : This distributor and transporter of natural gas in Arizona, Nevada, and California carries a Zacks Rank #2 and a VGM score of ‘B’. The company’s estimated growth rate for this year is 8%, higher than the industry’s return of 4.2%. The Zacks Consensus Estimate for its current year earnings advanced almost 1% over the last 60 days. The company gives a dividend of 2.44%.
Ameren Corporation (AEE - Free Report) : This company engages in rate-regulated electric generation, transmission, and distribution in Missouri and rate-regulated natural gas transmission and distribution businesses in Illinois. The company has a Zacks Rank #2 and a VGM score of ‘A’. The company’s estimated growth rate for this year is 5.3%, in contrast to the industry’s projected negative return. The Zacks Consensus Estimate for its current year earnings increased 6.7% over the last 60 days. The company has a dividend payout of 3.42%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Dean Foods Company : This food and beverage company has a Zacks Rank #1 and a VGM score of ‘A’. The company’s estimated growth rate for this year is 31.5%, above the industry’s return of 26.5%. The Zacks Consensus Estimate for its current year earnings advanced 3.2% over the last 60 days. The company gives a dividend of 1.88%.
Turning Point Brands, Inc. (TPB - Free Report) : This manufacturer and seller of smokeless and smoking tobacco products in the U.S. has a Zacks Rank #2 and a VGM score of ‘B’. The company’s estimated growth rate for next year is 38.3%, more than the industry’s return of 10.9%. The Zacks Consensus Estimate for its current year earnings increased 5% over the last 60 days.
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 ""Strong Buy"" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 ""Strong Sells"" and other private research. See the stocks free >>
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5 Top Defensive Stocks to Fight Market Uncertainty
Jobs growth lost momentum in November and the drop in unemployment rate did not herald in good news as it stemmed from a decline in labor force participation. The economy thus remains on tenterhooks. The major indices, in the meantime, gyrated this month as tech stocks bleed. President-elect Donald Trump’s policy changes and protectionism, along with a stronger dollar may pose concerns for companies having significant international exposure. Though Trump’s market-friendly policies have worked wonders for a slew of sectors, it is also turning the broader market into one giant bubble, raising possibilities of disenchantment for investors in the near term.
Outside the U.S., a resounding “no” vote in Sunday’s Italian referendum has kept investors on high alert. Given the turbulence, investing in defensive companies seems prudent. Such stocks provide consistent dividend and steady earnings regardless of the state of the global equity market.
Jobs Report Suggests Moderation in Growth
The November jobs report showed fewer-than-expected job additions, while the count over the prior two months has been trimmed. The U.S. economy added 178,000 jobs in November, less than analysts’ expectations of 180,000 to 200,000. Year-on-year employment growth has declined 7 basis points from 1.65% to 1.58%. The payroll count, in the meantime, was revised lower by a cumulative 2,000 over the last two months. While Professional & business services, construction and health care added jobs, all other industries showed no considerable addition.
Meanwhile, the unemployment rate fell to 4.6%, marking a 9-year low. But, the decline is largely because of the fall in participating rate. The big drop in the unemployed rate was the result of the 226,000 decline in civilian labor force. The participation rate decreased to 62.7% last month from 62.8%. It is now near the lowest since 1978. The news on wages was also discouraging. Average hourly earnings fell by 0.1% in November to $25.89 after a 0.4% rise in the prior month. This marks the first decline since Dec 2014.
Tech Tumbles on Fear of Trump Effect
The tech-heavy Nasdaq, which has lately been impacted by weakness in technology, fell 2.7% last week, its worst decline since the election on Nov 8. Among other major indices, the S&P 500 lost 1%, while the Russell 2000 index of small-cap stocks, which has been one of the biggest gainers post the election, fell 2.2% over the same time frame.
Trump’s tax reforms aren’t favoring the tech sector much. He is in favor of lowering corporate tax rate from 35% to 15%. This might be great news for some sectors, but not for techs at all. The tech sector’s current tax rate averages around 20%, which suggests that it earnings will receive a lesser boost compared to sectors with notably higher tax rates.
Tech behemoths often stash a lot of cash overseas. Among such companies with huge offshore cash balances are Apple Inc. (AAPL - Free Report) at $216 billion, Microsoft Corporation (MSFT - Free Report) at $111 billion, Cisco Systems, Inc. (CSCO - Free Report) at $60 billion and QUALCOMM Incorporated (QCOM - Free Report) at $29 billion. Trump’s policy that corporates will get a chance to repatriate foreign profits at a rate of 10% should benefit these tech stocks, but, his call for tariffs on goods manufactured overseas could make products pricey, eventually affecting revenues. Trump, on a personal level, doesn’t share a good rapport with several tech powerhouses including Amazon.com, Inc. (AMZN - Free Report) whose CEO Jeff Bezos was accused of evading corporate taxes (read more: 4 Hot Picks While Technology Feels December Freeze).
Substantial international exposure has also made major tech companies vulnerable, thanks to a stronger dollar. The rising dollar will deny revenues of multinational companies that rely heavily on profits from overseas.
Trump’s Rally a Bubble?
Trump’s market-friendly policies, however, helped major indices scale to all-time highs in November. However, this warns us that the market might be approaching the overbought region which will either be corrected by going sideways or lower.
According to Ed Yardeni, chief investment strategist at Yardeni Research Inc., the S&P 500’s forward price-to-earnings ratio climbed to 16.9 multiples last week from 16.4 multiples on Nov 8. When it comes to small-cap stocks, the ratio for the small-cap S&P 600 surged to 19.9 from 17.4 in the same period. These valuation levels are difficult to sustain unless the U.S. economy expands to 4% from the current level of about 3%.
Voters Reject Renzi in Referendum
On the international front, a stinging defeat of Italian Prime Minister Matteo Renzi dragged U.S. equity index futures down on Dec 4, while the euro touched a 20-month low. He said that he will resign following a referendum over his proposals for constitutional reforms. Exit polls and early projections indicated that he had lost the referendum by a wide margin.
Italian voters rejected the proposals aimed at ending a political gridlock and reviving Italy’s stagnant economy. This means that investors now view the country to be Eurozone’s biggest risk. Italy might be driven out of the Eurozone which could spark a banking crisis.
5 Defensive Stocks to the Rescue
As the markets seem to be plagued with widespread uncertainty including stretched valuations, defensive stocks seem to be the safest investment option. Such stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with the activities in the larger market. Their products are in constant demand irrespective of market volatility and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as not many people will be willing to live without electricity, gas and water. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaffected during economic downturns. We have, thus, selected five solid stocks from the aforementioned defensive sectors that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
SCANA Corporation : This distributor and seller of electricity to retail and wholesale customers has a Zacks Rank #2 and a VGM score of ‘B’. The company’s estimated growth rate for this year is 11.4%, in contrast to the industry’s projected negative return. The Zacks Consensus Estimate for its current year earnings increased 4% over the last 60 days. The company offers a dividend of 3.24%.
Southwest Gas Corporation (SWX - Free Report) : This distributor and transporter of natural gas in Arizona, Nevada, and California carries a Zacks Rank #2 and a VGM score of ‘B’. The company’s estimated growth rate for this year is 8%, higher than the industry’s return of 4.2%. The Zacks Consensus Estimate for its current year earnings advanced almost 1% over the last 60 days. The company gives a dividend of 2.44%.
Ameren Corporation (AEE - Free Report) : This company engages in rate-regulated electric generation, transmission, and distribution in Missouri and rate-regulated natural gas transmission and distribution businesses in Illinois. The company has a Zacks Rank #2 and a VGM score of ‘A’. The company’s estimated growth rate for this year is 5.3%, in contrast to the industry’s projected negative return. The Zacks Consensus Estimate for its current year earnings increased 6.7% over the last 60 days. The company has a dividend payout of 3.42%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Dean Foods Company : This food and beverage company has a Zacks Rank #1 and a VGM score of ‘A’. The company’s estimated growth rate for this year is 31.5%, above the industry’s return of 26.5%. The Zacks Consensus Estimate for its current year earnings advanced 3.2% over the last 60 days. The company gives a dividend of 1.88%.
Turning Point Brands, Inc. (TPB - Free Report) : This manufacturer and seller of smokeless and smoking tobacco products in the U.S. has a Zacks Rank #2 and a VGM score of ‘B’. The company’s estimated growth rate for next year is 38.3%, more than the industry’s return of 10.9%. The Zacks Consensus Estimate for its current year earnings increased 5% over the last 60 days.
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 ""Strong Buy"" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 ""Strong Sells"" and other private research. See the stocks free >>