7 Best Stocks To Buy To Hedge Against A Potential Downturn

Defensive stocks - 7 Best Stocks To Buy To Hedge Against A Potential Downturn

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Defensive stocks can help hedge long-term portfolios against potential declines in broader indices. Seasoned investors would concur that market cycles are a reality of equity investing. Therefore, today, I’ll introduce seven defensive stocks to buy in the case of declines in the coming weeks.

Despite the volatility during the days of the pandemic, many stocks have seen double-digit returns in the past year. For instance, in 2021, the Dow Jones Industrial Average, S&P 500, and Nasdaq-100 are up 12%, 12%, and nearly 7%, respectively. As a result, analysts wonder if a potential downturn could be around the corner.

Research by Robert Novy-Marx of National Bureau of Economic Research (NBER) suggests, “Defensive equity strategies have seen explosive growth over the last five years. These strategies overweight “safe” or “defensive” stocks, and under-weight “risky” or “aggressive” stocks, where these are typically defined by a stock’s volatility or market beta.”

Put another way, individuals with a low tolerance for wild price swings and large capital losses could benefit from exposure to defensive equity portfolios. With that information, here are seven defensive stocks that could belong in long-term portfolios.

  • Chewy (NYSE:CHWY)
  • Fidelity MSCI Consumer Staples Index ETF (NYSEARCA:FSTA)
  • Freeport-McMoRan (NYSE:FCX)
  • iShares Russell 1000 Value ETF (NYSEARCA:IWD)
  • Merck (NYSE:MRK)
  • Procter & Gamble (NYSE:PG)
  • Vanguard Dividend Appreciation Index Fund ETF Shares (NYSEARCA:VIG)

Defensive stocks: Chewy (CHWY)

The Chewy (CHWY) logo on a banner at the New York Stock Exchange.
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52-week range: $36.65 – $120
Year-to-date (YTD) price change: Down about 18%

During the pandemic, many pet owners used e-commerce platforms such as Chewy’s. The company offers products, supplies as well as medications for the nation’s much-loved pets. The online platform holds over 2,500 brands and 45,000 items. Chewy also has its own brands. The company’s current market capitalization (cap) stands at $30.6 billion.

In March, Chewy released robust four-quarter and full-year metrics. Sales were $7.15 billion in FY20, an increase of 47% year-over-year (YOY). In 2020, the pet group added 5.7 million new customers. It now has about 20 million “pet parents.” Quarterly net sales came at $2.04 billion, up 51% YOY. Investors were pleased to see an adjusted profit for the first time.

CEO Sumit Singh said, “we grew net sales by 47 percent year over year, increased our customer base by 43 percent year over year, delivered our first full year of positive adjusted EBITDA, and generated the company’s first quarter of positive net income in the fourth quarter of 2020.”

CHWY shares are up about 66% over the last year, but down 18% year-to-date (YTD). The stock’s price-to-sales (P/S) ratio is 4.2. Chewy is expected to release Q1 results on June 10. Interested investors might want to study the metrics before committing new capital into the shares. A further decline toward the $70 level would improve the margin of safety for buy-and-hold investors.

Fidelity MSCI Consumer Staples Index ETF (FSTA)

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52-week range: $33.93 – $43.66
YTD price change: Up about 6%
Dividend yield: 2.37%
Expense ratio: 0.08%, or $8 on a $10,000 investment annually

Next in line is an exchange-traded fund (ETF) that focuses on non-cyclical consumer businesses. Such companies usually manufacture or sell food, beverages, household items, as well as hygiene products — items we have to purchase no matter how the economy fares.

The Fidelity MSCI Consumer Staples Index ETF currently has 99 holdings. Since its inception in October 2013, net assets have reached $863 million. According to the sub-sectoral breakdown of the ETF, beverages (23.14%) make up the highest portion. Next in line are the food and staples retailing sector (21.65%) and household products (21.46%).

The top 10 names make up over 62% of all holdings. In other words, it is a top heavy fund. Among the leading names in the roster are Procter & Gamble, Coca-Cola (NYSE:KO), Walmart (NYSE:WMT), and PepsiCo (NASDAQ:PEP).

In the past year, valuations in many segments of the S&P 500 have reached high levels. Yet, the consumer-staples segment is not one of those sectors. A potential decline toward $40 would improve the risk/return profile. The current price supports a dividend yield of 2.37%.

Defensive stocks: Freeport-McMoRan (FCX)

Freeport-McMoRan Stock's Long List of Catalysts Boosts Its Buy Status
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52-week range: $9.44 – $46.10
YTD price change: Up about 69%
Dividend yield: 0.7%

PhoenixArizona-based Freeport-McMoRan is our next stock — one of the largest copper miners globally. The group’s business segments include refined copper products, copper in concentrate, gold, and molybdenum.

Copper, an important commodity, has been one of the hottest assets of 2021. Recovering economic activity worldwide has increased the global demand. The metal is used in infrastructure projects, such as construction, electrical network, or transportation and electrical networks. It is also playing a major role in the transition to alternative energy sources and products. For instance, electric vehicles (EVs) use about four times more copper than traditional cars.

The miner announced Q1 results in late April. Consolidated sales were $4.85 billion, up 73.3% YOY. Adjusted net income came at $718 million, or 48 cents per diluted share. As of March 31, Freeport-McMoRan had $4.58 billion in cash and equivalents.

CEO Richard C. Adkerson said, “Our Board adopted a new financial policy aligned with our strategic position as foremost in copper, prioritizing a strong balance sheet, increasing cash returns to shareholders and disciplined investments in profitable long-term growth.”

In the past 12 months, FCX stock has returned over 384%. Forward price-to-earnings (P/E) and P/S ratios are 16.5 and 3.86, respectively. Long-term copper bulls could look to buy the dips in FCX stock. A decline toward $37.50 would make the shares more attractive.

iShares Russell 1000 Value ETF (IWD)

An image of three glass piggy banks with ETF written on the sides on a table.
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52-Week Range: $108.92 – $163.39
YTD Price Change: Up about 18%
Dividend Yield: 1.67%
Expense Ratio: 0.19% per year, or $19 on a $10,000 investment annually

Our next choice is another fund, namely the iShares Russell 1000 Value ETF. It provides exposure to U.S. businesses that are regarded as undervalued compared to their peers. If you want to include value stocks in your portfolio, this ETF deserves your attention.

IWD began trading in May 2000 and currently has 856 holdings. Net assets stand around $53 billion. As far as sector weightings are concerned, financials leads the ETF with 21.57%, followed by industrials (13.83%), and health care (12.5%). The top ten names have approximately equal weights and make up around 18% of net assets.

Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), JPMorgan Chase (NYSE:JPM), Johnson & Johnson (NYSE:JNJ), Bank of America (NYSE:BAC), and Walt Disney (NYSE:DIS) are among the leading businesses in the fund.

IWD consists mainly of blue chip stocks, many of which are also stable dividend payers. In the past year, the fund returned over 41%. A potential decline toward the $150 level would improve the margin of safety for long-term investors.

Defensive stocks: Merck (MRK)

Merck (MRK) logo outside of corporate building
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52-Week Range: $71.72 – $87.80
YTD Price Change: Down about 8%
Dividend Yield: 3.43%

Next up on this list of defensive stocks is the pharma giant Merck. The group has treatments mainly against cancer and infectious diseases. Its research and products also extend to animal health. Keytruda, an antibody used in cancer immunotherapy, has become one of the top sources of revenue for Merck.

In late April, Merck released Q1 metrics. Sales were $12.1 billion, reflecting strong underlying performance of Keytruda, Lynparza, Bridion and animal health. Non-GAAP EPS was $1.40. During the quarter, Merck entered into HIV collaboration with Gilead Sciences (NASDAQ:GILD).

On the results, CEO Kenneth Frazier cited, “While our results this quarter were impacted by the pandemic, the underlying demand for our innovative products remains strong and we remain confident in our future growth prospects.”

Merck’s forward P/E and P/S ratios are 11.68 and 4.01, respectively. Long-term shareholders of Merck regard it as a reliable dividend company, which also buys back shares. Thus any further decline in MRK shares, especially toward $75 or below, would make it a better candidate for dividend growth and passive income investing.

Procter & Gamble (PG)

A photo of bottles of Tide detergent from Procter & Gamble (PG) on a store shelf.
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52-week range: $113.76 – $146.92
YTD change: Down about 5%
Dividend yield: 2.58%

The consumer goods sector is one of the most defensive industries, where Procter & Gamble is a leading name. Every week, billions of global citizens use its brands, including Ariel, Bounty, Cascade, Crest, Dawn, Gillette, Naturella, Pampers, Tide and more. It has a strong market share both in the U.S. and globally. 

In the past several quarters, management’s focus has been to make PG a leaner company. As a result, it has narrowed the number of brands to about 80. The restructuring efforts have also meant cost-cutting.

Procter & Gamble announced Q3 results in April. Organic sales were up 4%. In terms of geographies, organic sales increased by 7% in the U.S. and 22% in China. Diluted net earnings per share were up 13%, compared to the prior year.

Management noted that cleaning supplies and laundry detergent saw strong sales numbers. During the quarter, P&G returned $5 billion of cash to shareowners with $2 billion of dividends paid and $3 billion of PG shares repurchased.

President and CEO David Taylor said, “We delivered another quarter of solid top-line, bottom-line and cash results in what continues to be a challenging operating environment.”

In the past 12 months, PG stock returned 16%. Forward P/E and P/S ratios of 22.47 and 4.7 point to an overstretched valuation level. So interested investors might want to wait for a potential pullback toward $135 or below. With its dividend-aristocrat status, though, the shares appeal to passive income seekers.

Defensive stocks: Vanguard Dividend Appreciation Index Fund ETF Shares (VIG)

Photo of silver bull and bear figurines with the word "ETF" on top of gold coins out of focus in the background
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52-week range: $112.91 – $158.07
YTD Price Change: Up about 10%
Dividend yield: 1.53%
Expense ratio: 0.06% per year, or $6 on a $10,000 investment annually

We conclude today’s discussion of defensive names with another fund. The Vanguard Dividend Appreciation Index Fund ETF Shares follows the NASDAQ US Dividend Achievers Select Index. It invests in firms with a solid record of increasing their dividends regularly. Wall Street regards dividend growth as an important quality factor when selecting shares for long-term portfolios.

VIG started trading in April 2006, and net assets stand around $70.7 billion. In terms of sectors, we see industrials (22.1%), followed by consumer discretionary (16.6%), healthcare (15.2%) and financials (14.1%).

The fund has 247 holdings and the top 10 names make up about 31% of net assets. Leading holdings include Microsoft (NASDAQ:MSFT), JPMorgan Chase, Johnson & Johnson, Walmart, and Visa (NYSE:V).

The fund returned 34% in the past year and notched an all-time high in early May. Companies that grow dividends are typically seen as safe harbors in choppy markets. Those individuals nearing retirement years may also consider such dividend names for a consistent income stream. Any potential decline toward $150 would improve the margin of safety for investors in VIG.

On the date of publication, Tezcan Gecgil 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.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.

Article printed from InvestorPlace Media, https://investorplace.com/2021/06/7-best-stocks-to-buy-to-hedge-against-a-potential-downturn/.

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