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Stay Safe With 5 Defensive Stocks in an Extremely Volatile 2022
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Wall Street has witnessed a tough 2022 after an astonishing rally in the last two pandemic-ridden years. The economic pain of coronavirus has been felt for the first time this year as the U.S. government has stopped its fiscal stimulus and the Fed has turned ultra-hawkish from ultra-dovish in its monetary policies.
Inflation remains at a 40-year high despite an increase in the Fed Fund rate from almost zero to 2.5% from March to July. Additionally, the central bank has started to systematically reduce the size of its $9 trillion balance sheet since June.
Moreover, September is historically known as the worst-performing month on Wall Street. At this juncture, it will be prudent to stay invested in defensive stocks as these are less volatile in a market’s downtrend. Five such stocks with a favorable Zacks Rank are — NextEra Energy Inc. (NEE - Free Report) , The Southern Co. (SO - Free Report) , McKesson Corp. (MCK - Free Report) , PepsiCo Inc. (PEP - Free Report) and Archer-Daniels-Midland Co. (ADM - Free Report) .
An Ultra-Hawkish Fed
The consumer price index (CPI) for August rose 0.1% month-over-month and 8.3% year over year. The core CPI (excluding volatile food and energy items) increased 0.6% month-over-month and 6.3% year over year. Both data stood at a 40-year high level and above the consensus estimates.
A large section of economists and financial experts were expecting a decline in inflation in August due to a significant drop in energy prices and travel costs. However, food, shelter (housing and home building), vehicles and medical services drove costs higher in August.
Following the report, the Dow, the S&P 500 and the Nasdaq Composite – plunged 3.9%, 4.3% and 5.2%, respectively. The major stock indexes posted their worst single-day performance since Jun 11, 2020. Year to date, the Dow, the S&P 500 and the Nasdaq Composite – are down 14.4%, 17.5% and 25.6%, respectively.
Fed Chairman Jerome Powell and various other top Fed officials with voting rights have indicated that the rigorous rate hike will continue until inflation is at least down close to the Fed’s 2% target rate.
After August’s CPI data, market participants are expecting another 75 basis point hike in the benchmark interest rate in the September FOMC of the Fed is a foregone conclusion. Some investment analysts are also expecting a 1% rate hike this month.
As a result, market participants are highly concerned about a recession in the U.S. economy in the near future. Fed Chair Jerome Powell admitted that he cannot give any guarantee for a soft landing of the economy under a higher interest rate regime.
Why Should You Choose Defensive Stocks?
Markets are likely to remain volatile as investors are waiting for crucial FOMC meetings in September. Defensive sectors like consumer staples, utilities and health care should provide stability to one’s portfolio.
Defensive sectors are mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. These sectors include companies that provide necessities and products for daily use. Therefore, these sectors have always been a go-to place for investors, who want to play it safe during extreme market fluctuations irrespective of internal or external disturbances.
Year to date, out of the 11 broad sectors of the S&P 500 Index, the Utilities sector has gained 6.2%. The only sector, except Utilities, that has rallied in 2022 is Energy. Consumer Staples and Health Care are down 6.9% and 9.8%, respectively. The remaining sectors of the benchmark have tumbled in double digits so far in 2022.
Our Top Picks
We have narrowed our search to five defensive stocks with growth potential for the rest of 2022. These stocks have seen solid earnings estimate revisions in the last 30 days. Moreover, these companies are regular dividend payers. Each of our picks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
NextEra Energy is expanding domestic clean energy assets through acquisitions and organic initiatives. NEE has stakes in natural gas pipelines in Texas and gains from an increase in natural gas production.
To enhance flexibility, NextEra Energy completed a few financing agreements to secure funds for acquisition. NEE benefits from declining installation costs and improving renewable technology. It has sufficient liquidity to meet obligations.
NextEra Energy has an expected earnings growth rate of 13.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 30 days. NEE has a current dividend yield of 1.9%.
The Southern Co. is one of the largest electric utility holding companies in the United States, and the premier energy firm serving the attractive Southeast market. Positioned in a niche industry with high barriers to entry, SO’s less volatile and recession-proof business model presents a unique opportunity to earn high returns.
Southern Co. has gradually increased its customer base, ieveraging the demographics of its operating territories. With good rate-based growth and constructive regulation, SO is expected to generate steady earnings and dividend growth in the coming years.
The Southern Co. has an expected earnings growth rate of 6.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 30 days. SO has a current dividend yield of 3.4%.
McKesson provides pharmaceuticals and medical supplies in the United States and internationally. The strong fiscal first-quarter show by three of the four segments of MCK is encouraging. A strong earnings outlook for fiscal 2023 instills optimism.
Strong adjusted operating profit growth across the key segments of MCK is encouraging. A strong position in the Distribution market continues to favor the stock. McKesson played a crucial role in the COVID-19 response efforts in the United States and abroad via the distribution of COVID-19 vaccines, ancillary supply kits, and COVID-19 tests.
McKesson has an expected earnings growth rate of 2.4% for the current year (ending March 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 30 days. MCK has a current dividend yield of 0.60%.
PepsiCo benefits from the resilience and strength of global beverage and convenient food businesses. PEP expects to benefit by delivering convenience, variety and value proposition to customers through its brands. PepsiCo raised its revenue view for 2022.
PepsiCo has been continuously focused on driving greater efficiency and effectiveness, by driving down costs and plowing back these savings to develop scale and core capabilities. In 2019, PEP delivered in excess of $1 billion in productivity savings, keeping it on track with its goal of generating productivity savings of at least $1 billion annually through 2023.
PepsiCo has an expected earnings growth rate of 6.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. PEP has a current dividend yield of 2.7%.
Archer-Daniels-Midland has been gaining from solid demand, improved productivity and product innovations. Persistent growth in the Nutrition segment of ADM, aided by significant gains in the Human and Animal Nutrition units, remains the key growth driver.
Archer-Daniels-Midland expects the nutrition segment to record operating profit growth of 20% in 2022. The company has been significantly progressing on its three strategic pillars — optimize, drive and growth.
Archer-Daniels-Midland has an expected earnings growth rate of 31.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. ADM has a current dividend yield of 1.8%.
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Stay Safe With 5 Defensive Stocks in an Extremely Volatile 2022
Wall Street has witnessed a tough 2022 after an astonishing rally in the last two pandemic-ridden years. The economic pain of coronavirus has been felt for the first time this year as the U.S. government has stopped its fiscal stimulus and the Fed has turned ultra-hawkish from ultra-dovish in its monetary policies.
Inflation remains at a 40-year high despite an increase in the Fed Fund rate from almost zero to 2.5% from March to July. Additionally, the central bank has started to systematically reduce the size of its $9 trillion balance sheet since June.
Moreover, September is historically known as the worst-performing month on Wall Street. At this juncture, it will be prudent to stay invested in defensive stocks as these are less volatile in a market’s downtrend. Five such stocks with a favorable Zacks Rank are — NextEra Energy Inc. (NEE - Free Report) , The Southern Co. (SO - Free Report) , McKesson Corp. (MCK - Free Report) , PepsiCo Inc. (PEP - Free Report) and Archer-Daniels-Midland Co. (ADM - Free Report) .
An Ultra-Hawkish Fed
The consumer price index (CPI) for August rose 0.1% month-over-month and 8.3% year over year. The core CPI (excluding volatile food and energy items) increased 0.6% month-over-month and 6.3% year over year. Both data stood at a 40-year high level and above the consensus estimates.
A large section of economists and financial experts were expecting a decline in inflation in August due to a significant drop in energy prices and travel costs. However, food, shelter (housing and home building), vehicles and medical services drove costs higher in August.
Following the report, the Dow, the S&P 500 and the Nasdaq Composite – plunged 3.9%, 4.3% and 5.2%, respectively. The major stock indexes posted their worst single-day performance since Jun 11, 2020. Year to date, the Dow, the S&P 500 and the Nasdaq Composite – are down 14.4%, 17.5% and 25.6%, respectively.
Fed Chairman Jerome Powell and various other top Fed officials with voting rights have indicated that the rigorous rate hike will continue until inflation is at least down close to the Fed’s 2% target rate.
After August’s CPI data, market participants are expecting another 75 basis point hike in the benchmark interest rate in the September FOMC of the Fed is a foregone conclusion. Some investment analysts are also expecting a 1% rate hike this month.
As a result, market participants are highly concerned about a recession in the U.S. economy in the near future. Fed Chair Jerome Powell admitted that he cannot give any guarantee for a soft landing of the economy under a higher interest rate regime.
Why Should You Choose Defensive Stocks?
Markets are likely to remain volatile as investors are waiting for crucial FOMC meetings in September. Defensive sectors like consumer staples, utilities and health care should provide stability to one’s portfolio.
Defensive sectors are mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. These sectors include companies that provide necessities and products for daily use. Therefore, these sectors have always been a go-to place for investors, who want to play it safe during extreme market fluctuations irrespective of internal or external disturbances.
Year to date, out of the 11 broad sectors of the S&P 500 Index, the Utilities sector has gained 6.2%. The only sector, except Utilities, that has rallied in 2022 is Energy. Consumer Staples and Health Care are down 6.9% and 9.8%, respectively. The remaining sectors of the benchmark have tumbled in double digits so far in 2022.
Our Top Picks
We have narrowed our search to five defensive stocks with growth potential for the rest of 2022. These stocks have seen solid earnings estimate revisions in the last 30 days. Moreover, these companies are regular dividend payers. Each of our picks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
NextEra Energy is expanding domestic clean energy assets through acquisitions and organic initiatives. NEE has stakes in natural gas pipelines in Texas and gains from an increase in natural gas production.
To enhance flexibility, NextEra Energy completed a few financing agreements to secure funds for acquisition. NEE benefits from declining installation costs and improving renewable technology. It has sufficient liquidity to meet obligations.
NextEra Energy has an expected earnings growth rate of 13.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 30 days. NEE has a current dividend yield of 1.9%.
The Southern Co. is one of the largest electric utility holding companies in the United States, and the premier energy firm serving the attractive Southeast market. Positioned in a niche industry with high barriers to entry, SO’s less volatile and recession-proof business model presents a unique opportunity to earn high returns.
Southern Co. has gradually increased its customer base, ieveraging the demographics of its operating territories. With good rate-based growth and constructive regulation, SO is expected to generate steady earnings and dividend growth in the coming years.
The Southern Co. has an expected earnings growth rate of 6.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 30 days. SO has a current dividend yield of 3.4%.
McKesson provides pharmaceuticals and medical supplies in the United States and internationally. The strong fiscal first-quarter show by three of the four segments of MCK is encouraging. A strong earnings outlook for fiscal 2023 instills optimism.
Strong adjusted operating profit growth across the key segments of MCK is encouraging. A strong position in the Distribution market continues to favor the stock. McKesson played a crucial role in the COVID-19 response efforts in the United States and abroad via the distribution of COVID-19 vaccines, ancillary supply kits, and COVID-19 tests.
McKesson has an expected earnings growth rate of 2.4% for the current year (ending March 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 30 days. MCK has a current dividend yield of 0.60%.
PepsiCo benefits from the resilience and strength of global beverage and convenient food businesses. PEP expects to benefit by delivering convenience, variety and value proposition to customers through its brands. PepsiCo raised its revenue view for 2022.
PepsiCo has been continuously focused on driving greater efficiency and effectiveness, by driving down costs and plowing back these savings to develop scale and core capabilities. In 2019, PEP delivered in excess of $1 billion in productivity savings, keeping it on track with its goal of generating productivity savings of at least $1 billion annually through 2023.
PepsiCo has an expected earnings growth rate of 6.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. PEP has a current dividend yield of 2.7%.
Archer-Daniels-Midland has been gaining from solid demand, improved productivity and product innovations. Persistent growth in the Nutrition segment of ADM, aided by significant gains in the Human and Animal Nutrition units, remains the key growth driver.
Archer-Daniels-Midland expects the nutrition segment to record operating profit growth of 20% in 2022. The company has been significantly progressing on its three strategic pillars — optimize, drive and growth.
Archer-Daniels-Midland has an expected earnings growth rate of 31.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. ADM has a current dividend yield of 1.8%.