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Ride Out a Rocky August With These 6 Defensive Picks

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July has been a good month for the markets, with each of the major benchmarks in the green year to date. A confluence of strong second-quarter earnings and bullish economic data has propelled stocks upward. However, recent losses suffered by tech majors could herald a big selloff in the days ahead.

Market watchers also feel that the absence of major catalysts could rob markets of their current momentum. Ultimately, the month ahead could be a difficult one for stocks, marked by higher levels of volatility. This is because trade tensions continue to linger. Further, August is also a historically difficult month for stocks.

At this point, it makes sense to bet on defensive stocks. These stocks offer slower but stable growth during periods of uncertainty. Since they also hold out the promise of higher-than-average yields, investing in defensive stocks looks like a prudent option at this point.   

Tech Apocalypse Around the Corner?

On Jul 30, the Nasdaq posted a three-day loss of 3.9%, its worst decline since late March. These losses have been triggered by Facebook’s (FB - Free Report) historic plunge after it released a dismal revenue outlook last week. Shares of the company lost 2.2% on Monday, pushing the social media giant into bear-market territory.

The Facebook contagion has spread to the entire FAANG group of stocks. Analysts are once again questioning the sky-high valuations of tech stocks. Consumer discretionary and tech stocks are largely responsible for this year’s market rally, with both sectors up more than 12% year to date.

Now, analysts at Morgan Stanley (MS - Free Report) feel that both these sectors could soon suffer a heavy selloff. The reverses suffered by Facebook and Netflix (NFLX - Free Report) over the last few days only serves to strengthen such a view.

Absence of Catalysts, Dismal Historical Data

The investment bank also feels that the current market rally is flashing signals of “exhaustion.” With a strong second quarter, particularly Amazon’s (AMZN - Free Report) results, and bullish GDP data out of the way, investors are thinking “what do I have to look forward to now?”

Morgan Stanley believes that the selloff has only just begun and the correction to follow will be the largest since the one suffered in February. Paul Hickey, founder of Bespoke Investment Group thinks August is “not a great month for equities.” According to Hickey, August has been a difficult month for the S&P 500 since 1983.

And the situation has worsened in recent years. Since 1983, markets have declined over the first 10 days of August, per Bespoke. But in the current bull market, the decline has not stopped even late into the month.

Defensive Stocks to Gain Popularity

In such a scenario, defensive sectors, such as real-estate, consumer staples and utilities are likely to gain popularity. These stocks grow at a slower pace than the rest of the economy. However, they are more stable in nature and safer during periods of economic uncertainty.

These also offer dividend yields which are higher than the overall market. Such a characteristic had actually decreased their attractiveness during a year when treasury yields have peaked. But with trade tensions cropping up, they may prove to be popular, especially among risk-averse investors.

Our Choices

Markets have enjoyed strong gains in July, powered by strong earnings and bullish economic data. But in the absence of such catalysts, headwinds such as trade tensions and valuation concerns are likely to weigh on investors. August is also a historically weak month for stocks and a tech selloff may be heralding a larger correction.

Investing in defensive stocks, which offer a safe and stable choices during periods of uncertainty, looks like a good option at this point. Further, they carry the promise of above-average dividend yields. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

NRG Yield, Inc. (NYLD - Free Report) , along with its subsidiaries, owns and operates a diversified portfolio of contracted renewable and conventional generation, and thermal infrastructure assets in the United States.

NRG Yield has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 31.7% for the current year. The Zacks Consensus Estimate for the current year has improved 10.7% over the last 30 days. The stock has a dividend yield of 6.9%.

Sutherland Asset Management Corporation (SLD - Free Report) is a commercial mortgage real estate investment trust (REIT).

Sutherland Asset Management has a Zacks Rank #1. The company’s expected earnings growth for the current year is 15.5%.The Zacks Consensus Estimate for the current year has improved 1.2% over the last 30 days. The stock has a dividend yield of 9.7%.

New Media Investment Group Inc. (NEWM - Free Report) is an investor, owner and operator of local media assets in the United States.

New Media Investment Group has expected earnings growth of 53.7% for the current year. The Zacks Consensus Estimate for the current year has improved 10.7% over the last 60 days. The stock has a dividend yield of 8.2%.Ithas a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Archer Daniels Midland Company (ADM - Free Report) is one of the leading food processing companies in the world.

Archer Daniels Midland has a Zacks Rank #2 (Buy). The company has expected earnings growth of 29% for the current year. The Zacks Consensus Estimate for the current year has improved 1.4% over the last 30 days. The stock has a dividend yield of 2.8%.

Dominion Energy, Inc. (D - Free Report) together with its subsidiaries produces and transports energy in the United States.

Dominion Energy has a Zacks Rank #2. The company has expected earnings growth of 14.2% for the current year. The Zacks Consensus Estimate for the current year has improved 0.7% over the last 30 days. The stock has a dividend yield of 4.7%.

Essex Property Trust, Inc. (ESS - Free Report) is a REIT engaged in the acquisition, development, redevelopment and management of multifamily residential properties in supply constrained markets.

Essex Property Trust has a Zacks Rank #2. The company has expected earnings growth of 5.2% for the current year. The Zacks Consensus Estimate for the current year has improved more than 0.3% over the last 30 days. The stock has a dividend yield of 3.2%.

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