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Defensive stocks might be the best plays over the coming months. In many sports games, players need to adjust between an offensive strategy to score and a defensive one to guard. The market isn't much different.
The market's growing agitation has yet to shift investor sentiment toward fear, but that only compounds the risk. Unfortunately, retail investors still have the "buy the dip" mentality. They are betting that the good times for markets will continue. History isn't on their side.
The 2008 financial crisis more than a decade ago is a bullish turning point. The Federal Reserve stepped up to save the markets from a liquidity lockdown. More recently, the 2020 pandemic threatened to create an illiquid market. And once again, the Fed intervened to add trillions of dollars in liquidity to the markets.
This time, speculators believe the Fed will repeat its loose monetary policies, but inflation rates are at levels not seen in 40 years.
The supply shortage is one of the major factors causing prices to rise. Yet "the great resignation" is a permanent trend. The worker shortage puts pressure on wage inflation. Companies must pay more to retain staff. They pass the higher costs to consumers, raising prices.
Energy costs, a big component of inflation, are rising. Besides the risks related to war, government policies that favored environmentally friendly initiatives also created a shortage of oil.
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The government does not have any tools to reverse higher energy costs. The higher prices for goods are another reason the Fed needs to slow the economy.
I've provided the quality scores for seven firms in the chart. The higher the score, the better the quality, as measured by factors including return on investment and capital efficiency.
Investors need to ramp up a strategy that includes defensive stocks. Demand a discount on stocks and avoid high-flying, expensive stocks that have no profits. Avoid companies that have too much debt as higher interest rates will increase their debt burden.
There are seven defensive stocks to buy. They are:
- Cisco Systems (NASDAQ:CSCO)
- Home Depot (NYSE:HD)
- Coca-Cola (NYSE:KO)
- Altria Group (NYSE:MO)
- Merck & Co (NYSE:MRK)
- Procter & Gamble (NYSE:PG)
- Exxon Mobil (NYSE:XOM)
Defensive Stocks to Buy: Cisco Systems (CSCO)
Cisco, a networking firm that survived the dot-com bubble more than two decades ago, posted strong second-quarter results.
Business momentum pushed revenue up by 6% year-over-year to $12.7 billion. Cisco reported earnings per share of 71 cents, up by 18% year-over-year. It also increased dividends by 3% and added another $15 billion in stock buybacks.
For the third quarter, Cisco expects revenue to grow 3% to 5% year-over-year. GAAP EPS will be in the range of 70 – 74 cents.
For the year, GAAP EPS will be $2.83 to $2.92. Cisco's avoidance of reporting in non-GAAP is notable. Unlike unprofitable startups using non-GAAP accounting, Cisco ought to thrive in a post-pandemic world.
Without lockdowns, it has $14 billion of backlog to work through.
Cisco has multiple tailwinds. This includes 5G, 400G, WiFi 6, hybrid cloud and work, and edge compute. The technology transition will play out over several years.
Moreover, the company has strong customers including the government. Its broad-based consistent growth in the public sector, including education, will result in supporting Cisco's steady growth.
Home Depot (HD)
As people emerge from the lockdown, they will go to Home Depot stores to buy home improvement goods.
For example, after spending months at home, people may have a long list of things that need fixing.
Home Depot may split its stock price to increase its liquidity and affordability for retail investors. Furthermore, it will attract more income investors if it raises its dividend. It could announce an aggressive share buyback to increase investor returns.
The retailer observed very steady demand over the course of the past five quarters. During the pandemic, it benefited from government stimulus flowing through the economy.
It does not need that bonus bump to grow. In the new hybrid work environment, people need to invest in their homes. This will lengthen Home Depot's business cycle. Expect revenue to beat analyst expectations for the next few quarters as a result.
On Wall Street, 10 out of 12 analysts rate HD stock as a buy. The average price target is $428.55, according to Tipranks. It trades at around $316 today.
Defensive Stocks to Buy: Coca-Cola (KO)
Consumer discretionary firm Coka-Cola is a dividend king.
When it declared a 44-cent quarterly dividend on Feb. 17, it raised it by 4.8%. This also marked the 60th consecutive annual dividend increase.
KO stock will not likely fall after the company said it would resume its stock buyback in 2022. It will buy back around $500 million in shares this year. This commitment is under its repurchase authorization plan of around 160 million shares.
In the fourth quarter, Coke posted revenue of $9.5 billion, up by 10.5% year-over-year. For the fiscal year 2022, the company expects organic revenue will grow 7% to 8%. Non-GAAP EPS will grow by 8% to 10%.
Coke owes its long-term growth to more countries reopening. Those additional tailwinds will lift 2022 results. In addition, inflation will push its costs.
The company has the branding power to increase prices. It will also leverage both its strong marketing and innovation. This will prevent customers from demanding fewer Coca-Cola products.
Altria Group (MO)
In the tobacco sector, Altria's uptrend should not discourage investors from buying MO stock today.
The company won a major case, putting an end to uncertainties that clouded its stock.
On Feb. 15, the U.S. Federal Trade Commission dismissed a complaint against Altria. The FTC sued Altria for buying a 35% stake in Juul, an e-cigarette firm.
It argued that Juul is Altria's competitor that would result in closed-system e-cigarettes. The ruling does not change Altria's damage in overpaying for Juul.
Three years ago, its investment valued the stake at $12.8 billion. Since then, a regulatory crackdown for Juul's products hurt its valuation.
MO stock is due to trend higher from here. Last October, the Food and Drug Administration approved the marketing of e-cigarettes for three firms. Once Juul gets approval, Altria's stake in the business will recover.
In the cannabis market, Altria needs its Cronos (NASDAQ:CRON) investment to recover. That will happen if the U.S. government legalizes cannabis federally.
Still, MO stock will reward investors without this event. Its tobacco business generates strong free cash. Altria distributes the cash flow through dividends to shareholders.
Defensive Stocks to Buy: Merck & Co (MRK)
In the pharmaceutical space, Merck is an attractive value stock. After pulling back on no news, investors should consider the stock for its Covid-19 antiviral pill sales.
In the fourth quarter, Merck posted sales of $13.5 billion, an increase of 24% year-over-year. GAAP EPS from continuing operations was $1.51. For the full-year 2021, Merck's revenue came mostly from Keytruda sales ($17.2 billion and Gardasil ($5.7 billion).
For 2022, Merck expects sales of between $56.1 billion and $57.6 billion. It will earn up to $5.91 a share. Importantly, molnupiravir, an antiviral pill to treat Covid-19, will have between $5 billion to $6 billion in sales.
Recently, Covid-19 vaccine companies fell as investors lost interest in the sector. They believe the pandemic is over. This assumption is incorrect.
The virus will continue to evolve. Hospitals will need a first-line defense for patients at risk of hospitalization. Merck will have an antiviral pill on the market as a treatment option.
Procter & Gamble (PG)
P&G is a winner in the consumer discretionary space. The company has a diversified product portfolio that people need. As inflation raises input prices, P&G has the pricing power to pass higher costs to consumers.
In Q4, P&G posted revenue growing by 6.1% year-over-year to $20.95 billion. EPS rose by 13% Y/Y to $1.66. Procter & Gamble's sales growth will be in the range of 2% to 4%. Core EPS will grow in FY 2022 in the range of 3% to 6%.
The company has multiple top-line growth drivers. For example, its beauty line grew incrementally in the last five years. It added more than $1 billion in incremental profit.
By offering personal care and skin products. P&G has goods in its beauty portfolio that many people need. China is a weak segment for P&G.
In the last four or five years, sales grew in the high single or low-teens. The company has a strong supply chain and is investing in research and development. This will lift growth in China at above 6%.
Defensive Stocks to Buy: Exxon Mobil (XOM)
Although energy stocks have already risen sharply since December 2021, Exxon has strong prospects.
Investors should consider XOM stock as a hedge against rising oil prices. Whenever prices rise, XOM stock usually increases offsetting a drop in stocks in other sectors.
In the fourth quarter, Exxon posted $48 billion in cash flow from operating activities. This is a level not seen in a decade (since 2012). It took advantage of its strong performance by cutting debt by over $20 billion.
This is a prudent move. The Fed's aggressive interest rate hike in the next 12 months will increase the cost of debt.
Its revenue rose by 82.6% year-over-year to $84.97 billion. The energy firm also expects it will achieve its 2025 emission-reduction plans four years ahead of schedule.
XOM stock to hold an uptrend. The company will buy back up to $10 billion of its shares in the next 12 to 24 months.
Chief Executive Officer Darren Woods said that it is strengthening its portfolio by looking less at volume and targets. Instead, it seeks quality and profitability for the barrels of oil it produces.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
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