For now, investors have shaken off rising inflation and increased interest rate fears. With these concerns fading, richly priced sectors, like tech, appear to be the stocks to buy right now. But, a few months down the road, sentiment may start changing direction.
Why? Through September, the “transitory inflation” thesis — that the rise in prices seen so far this year is the product of the Covid-19 recovery — could hold. Yet, once summer wraps up, and supply shocks, labor shortages and other factors that have been behind rising prices persist, the Federal Reserve may have to take more aggressive action. That could mean a sooner-than-expected hike in interest rates.
As The Wall Street Journal opined June 28, the now-placid stock market may have an outsized reaction to any policy change that makes cash and bonds more attractive again. In other words, high risk for a stock market correction. Ahead of the possible storms, where’s a good area to shift your portfolio?
How about low-volatility stocks?
In times of market turmoil, these types of defensive plays typically experience less dramatic price fluctuations. So, what are some safe harbor stocks to buy ahead of a Fed-induced market maelstrom, consider these seven worthwhile options:
- Dollar General (NYSE:DG)
- Johnson & Johnson (NYSE:JNJ)
- Kellogg Company (NYSE:K)
- Kimberly-Clark (NYSE:KMB)
- NextEra Energy (NYSE:NEE)
- Verizon (NYSE:VZ)
- Walmart (NYSE:WMT)
Stocks to Buy: Dollar General (DG)
Dollar General stock was a big winner at the start of the Covid-19 pandemic last spring. But, the “stay at home” orders slowly came to an end and the “stockpiling” trends did as well. In turn, the hot run in this discount retailer’s shares ran out of momentum.
But, as seen from its recent earnings beat, and its guidance increase, the company’s underlying business remains strong. Even as the U.S. has moved from “lockdown mode” to “recovery mode” with the virus. Since releasing its most recent results, DG stock has bounced back, after a slight sell-off in May. Admittedly, some of this may have to do with the overall market’s rebound during that time frame.
Yet, don’t take to mean this safe harbor stock is in for a bumpy ride. With a beta, or volatility compared to the overall market, usually measured using an index like the S&P 500 index (NYSEARCA:SPY), of 0.5, Dollar General shares should remain relatively stable, no matter how stormy stocks (possibly) get later this year.
To top it all off, it’s also a name that stands to benefit from rising prices. If inflation persists, and households continue to feel the pinch, demand will rise for value-oriented retailers like this one. With all these factors in its favor, keep DG stock on your radar as a potential safe harbor.
Johnson & Johnson (JNJ)
A dividend aristocrat in a defensive sector (healthcare), JNJ stock may be one of the best stocks to buy ahead of possible volatility. Most of the attention around Johnson & Johnson right now may be about its Covid-19 vaccine, from its Janssen unit.
But, as you likely know, J&J is more than just a pharmaceutical company. It’s also a consumer staple play, via its consumer health segment, with brands such as Tylenol, Listerine, and Band-Aid. In addition, it’s a medical device company, producing products that help treat a variety of diseases and ailments.
With high margins, and its aforementioned dividend (2.58% yield), which has increased 58 years in a row, this is one of the highest quality stocks out there. Not only that, trading for a forward price-to-earnings ratio of 17.2x, it trades for a reasonable valuation at today’s prices (around $164 per share).
In the melt-up we’ve seen play out in stocks since 2020, JNJ stock has performed well, but hasn’t made the kinds of jaw-dropping moves seen with stocks in hotter sectors. But, if the second half of 2021 brings turmoil to the overall market, consider this one of the stocks investors will flock to as a safe harbor. That’s not to say it’ll see an immediate rise in value. Yet, it could mean it stays resilient, while higher-volatility names make more dramatic moves.
Kellogg Company (K)
When it comes to consumer staple plays, investors have many options. So, why go with Kellogg specifically? Shares of its peers, like Conagra Brands (NYSE:CAG) and General Mills (NYSE:GIS) have similar attributes. That is, recession-resistant businesses, low volatility (as measured by beta) and stable dividends.
But, another factor that could bode well for K stock is the potential for it to continue beating expectations. Earlier this year, I discussed how this stock was at risk of being a value trap. At the time, the expectation was that, after seeing its results boosted in 2020 by the pandemic, its revenue and earnings would pull back in 2021.
Yet, as seen from the better-than-expected results it’s posted lately, that may not be the case. Granted, we’re not talking about booming growth. In this situation, “better than expected” means low-single digit sales growth, versus projections of slight declines. Even the top end of projections call for only high-single digit percentage growth in its earnings-per-share for 2022.
The “slow and steady” prospects notwithstanding, Kellogg shares will likely hold up, if investors go from “risk on” to “risk off,” on the heels of high inflation/rising interest rates. And, if markets don’t encounter storms in the coming months? As it continues to beat expectations, shares could move higher, as the lukewarm sentiment around it shifts to fully positive.
Historically, Kimberly-Clark has been a low-volatility stock. Its five-year beta stands at 0.52. Yet, investors who got into it after last spring’s Covid stockpiling of paper products (namely toilet paper) may not share the same opinion.
As supply shocks for paper products started to cool, and households stopped hoarding toilet paper like it was a scarce commodity, KMB stock moved lower by double-digits. Even so far in 2021, its shares have seen middling performance (down 1.70% year-to-date), while the S&P 500 is up more than 14% during the same timeframe.
However, its recent declines may not be indicative of future results. Yes, inflation could be bad news for its margins. Some analysts, like Wells Fargo’s Chris Carey, are concerned that its results will fall short of the company’s own forecasts. But, with its continued declines, investors have anticipated this issue, with its price decline since last summer. With disappointment priced in, it may not be at risk of pulling back further.
KMB stock is possibly finding its floor at today’s prices (around $131 per share). With its many positives, including a reasonable valuation (forward P/E of 18x, 3.44% dividend yield), and historically low-volatility nature, this could be another defensive play investors turn to, if markets go haywire in the months ahead.
NextEra Energy (NEE)
Again, like with other defensive sectors like consumer staples and healthcare, investors have many options when it comes to utilities stocks. But, while NextEra Energy is not the highest yielding one around, and is richly-priced (forward P/E of 29.4x) to boot, NEE stock could be one to keep an eye on.
Why? More so than its peers, NextEra has embraced a carbon-free future. It already generates enough electricity from renewables to power 7 million homes, and it isn’t stopping there. Not only that, as InvestorPlace’s Joel Baglole recently wrote, the company stands to benefit from President Biden’s ambitious changes to America’s clean energy policy.
So, how is it a defensive stock, when it sounds like a hot “green wave” play? What keeps it in the “safe and boring” category is its legacy business, Florida Power & Light (FPL). This gives the company, and the underlying stock, a greater degree of stability compared to pure-play clean energy stocks. This may come in handy, if markets get rocky, and green “story stocks” possibly take a tumble, as rising interest rates lead to valuation contraction.
NEE stock has a beta higher than most of the other stocks listed here (0.72). But, still less volatile than the overall market, chances are it’ll hold up well in a correction.
Telecom may be considered a defensive sector. But, among the major names in this space, Verizon appears to be the best safe harbor play. Why? Take a look at its main peers, AT&T (NYSE:T) and T-Mobile US (NASDAQ:TMUS), and the answer’s clear.
AT&T has a similar core business. But, still working through its ill-fated media acquisition binge, and after its dividend cut, shares may be at risk of making another move lower in the interim. T-Mobile? After its successful merger with Sprint, and its subsequent organic subscriber growth, things are booming for the wireless carrier. Yet, this is more than reflected in its stock price, as seen from its premium valuation (forward P/E of 65.6x).
Verizon doesn’t have this kind of buzz around it that’s currently around T-Mobile. On the other hand, it doesn’t have the level of headwinds AT&T continues to experience. Instead, it’s in the middle of the road, moving on from its own ill-fated diversification (digital media), and keeping up with changes (5G) in its main business.
Sure, this may not translate into impressive revenue or sales growth. Over the next year, projections call for growth in the low-single digits. But, cheaply priced at 11x this year’s earnings, with its stable 4.5% dividend yield, low-volatility VZ stock (with a beta of 0.45) is a name that could hold up well, if the stock market goes from melting up, to melting down.
After “crushing it” at the height of Covid-19, WMT stock admittedly hasn’t been a winner so far in 2021. Instead, it’s down 4.75% year-to-date. Seeing the performance last year as a “one and done” event, Walmart investors have moved on.
Given its expected performance this year compared to last, it’s no surprise why. Projections call for mid-single digit earnings growth. Also, as InvestorPlace’s Dana Blankenhorn wrote May 27, Walmart faces many challenges as things get back to normal. It’s having to compete with Amazon (NASDAQ:AMZN), by diversifying in all directions (package delivery, telehealth). Its market share with groceries could be under threat as well.
This points to WMT stock struggling to bounce back toward its 52-week highs of $151.87 per share (from $137.30 today). Yet, don’t take this to mean shares are at risk of a big decline. Even if the market overall corrects in the coming months. Its valuation today (forward P/E of 23.1x) may be higher than it’s been historically. This could be an issue, if rate increases cause across-the-board valuation contraction for stocks.
But, if rising inflation and subsequent rising rates gives way to economic contraction, the stability offered by Walmart’s recession resistant business could help to counter this. To top it all off, its value-focused retail operations could benefit from continued high inflation. Add it all together, and this low-volatility stock could hold up reasonably well, if markets-at-large correct.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.