There’s currently little to suggest that the economy is in any immediate danger of tanking. Well, to be more accurate there are mixed signals in relation to a U.S. economic rebound. Back in June, the U.S. Bureau of Economic Analysis released data indicating that GDP growth reached 6.4% in the first quarter. That was almost inarguably a positive.
Yet, there are arguments and signals indicating that the economy may not be as strong as it may appear at first blush. By now, most people are aware that the U.S. inflation report for June was rather serious. Inflation increased 5.4% last month relative to the same period a year prior. The Fed is actively trying to characterize that figure as transitory. That alone is leading consumers to worry.
Economic stimulus programs and corresponding money printing figure largely into that aspect of the argument. Time will tell what the effects of such choices will be on the U.S. economy. Housing prices are hot, as are used car prices, and the end of rent moratoriums could spell trouble. None of this even mentions continued pandemic concerns and the threat of the delta Covid-19 variant.
A bearish take on the economy is that it may indeed roll over. That would mean recessionary times could be on the horizon. In that case a shift toward defensive stocks would be in order.
In this theoretical scenario, these stocks make a lot of sense to buy.
- Coca-Cola (NYSE:KO)
- Philip Morris International (NYSE:PM)
- Mondelez International (NASDAQ:MDLZ)
- AGNC Investment (NASDAQ:AGNC)
- Diageo (NYSE:DEO)
- The AES Corporation (NYSE:AES)
- UGI Corporation (NYSE:UGI)
Stocks to Buy: Coca-Cola (KO)
The idea here is that in the event that the economy flounders, defensive stocks are a smart choice. Coca-Cola has become almost synonymous with defensive stocks in general. It is noted as a strong, stable choice for investors in the best of times and in the worst of times.
Coca-Cola couldn’t avoid the precipitous price drop that affected the entire market when the pandemic began. But it has performed steadily since. KO stock prices only momentarily faltered for a few weeks at the absolute depths of the pandemic. By the beginning of April 2020 they were near $49.
Prices have marched steadily upward from there and currently sit above $57. That range is testament to the kind of steady, reliable investment that Coca-Cola represents.
Is KO stock one to buy for growth investors seeking rapid price appreciation? Absolutely not. But it is a stock to buy for those investors looking for a steady performer that offers a dividend. That dividend will almost certainly be 42 cents in the fourth quarter. It should rise to 43 cents per quarter next year following the same pattern of progression it has for years.
And Coca-Cola recently reported strong second quarter earnings on July 21. Net revenues grew by 42% in Q2, to hit $10.1 billion. Operating income increased by 52%. That’s why KO stock continues to make sense in just about any economy.
Philip Morris International (PM)
Like Coca-Cola, Philip Morris is another name that has become nearly synonymous with the defensive stock sector. It, too, was unable to escape the gravity of the pandemic onset on the stock market. The good news is that PM stock now sits above pre-pandemic prices which hovered near $87. Share prices are above $99. It does seem that not much can hold Philip Morris down for long.
Philip Morris released second quarter earnings on July 20. Share prices dropped from just under $98, to below $95 on news that “it now expects to earn between $5.76 and $5.86 a share, down from a prior range of $5.93 to $6.03.”
PM stock was already back above $98 a few short days later. The company blamed customs assessments in Saudi Arabia for the decrease in guidance. It had warned of the possibility before.
The other truth that provides testament to Philip Morris’ resilience is the fact that it is transitioning away from smoked tobacco as regulations stiffen. Smoke-free products contributed 29% of revenue in the quarter. PM stock is characterized as a “sin stock” just about as often as it’s call a “defensive stock.” PM shares simply continue to remain steady despite the transition.
Whichever moniker is more apt is irrelevant, it performs and reliably provides a $1.20 dividend.
Mondelez International (MDLZ)
Mondelez International is a snack food and beverage giant. Investors who don’t recognize it based on its current name may know it through its previous incarnation as Kraft, now Kraft-Heinz (NASDAQ:KHC). The two companies split back in 2012. That corporate history lesson aside, MDLZ stock is a solid choice when the economy rolls over.
The company will release Q2 earnings later today. MDLZ stock should remain relatively steady no matter the outcome. Analysts are positive in any case. The 17 analysts who cover Mondelez expect that it should record $6.41 billion in revenue, up 8.5%. They project that the company should post 5.7% and 6.7% growth in the third and fourth quarters of 2021.
One of the few knocks on the consumer staples giant is that it does have a relatively modest 1.94% dividend yield. That equates to 31.5 cents for each share. Nevertheless, Wall Street is undeterred in recommending MDLZ as a buy.
AGNC Investment (AGNC)
REITs, or real estate investment trusts, usually feature regularly on defensive stock lists. Part of the reason that these vehicles perform well as a defensive strategy is the role of real estate within the broader economy.
Generally speaking, rent is one of the least avoidable expenses consumers face. However, REITs come in several flavors but often focus on the residential market or the commercial market. The residential market is arguably the more important of the two as people need homes despite the economy.
That makes residential REITs, including AGNC stock, strong bets in tough times. The company faltered somewhat in early June which coincided with its announcement of a 12-cent dividend.
There is little rhyme or reason as the dividend was very much in line with the previous monthly 12-cent payout that it had issued since April of 2020. Look for the company to approach pre-pandemic levels if Q2 earnings are positive.
The so-called ‘sin stocks’ are often ‘defensive stocks’. And consumer demand for alcohol is generally considered recession proof. However, certain demand dynamics occur within the alcohol industry depending on the prevailing economic conditions. For example, in the 2008 recession beer sales declined but hard liquor sales shot way up.
In the event that a recession does occur, and it follows that same trend I just mentioned, Diageo will be a strong play. That’s because Diageo’s brands are almost entirely hard liquors. They include Johnny Walker, Crown Royal, Tanqueray, Smirnoff, and Bailey’s to name a few. The sole beer brand is Guinness.
Long story short: Hard liquor sales could soon spike, and DEO stock will be very profitable in that case.
Diageo will release earnings at the end of July, so we’ll have to wait a bit to see how that affects share prices. But if short interest is any indication of the direction DEO stock is headed, then it’s probably upward. Short interest sits at 0.11%, meaning almost no one is betting that share prices will go down soon.
The AES Corporation (AES)
The AES Corporation is an electric utilities company. Like all the other sectors represented on this list, utilities tend to do very well regardless of the economic climate. That doesn’t mean that all utilities are investment grade, but it does suggest the sector is worth consideration in tough times.
AES looks like it is among those strong performing utilities worthy of investment. According to the analysts covering AES stock there is growth in front of the Arlington, Virginia-based company. Those analysts anticipate that the power producer will see revenue growth of 2.8% throughout 2021. That figure should rise to 3.6% throughout 2022.
Those growth figures may not seem exceptional. However, in a traditional and predictable sector like utilities that growth corresponds to steady increases in share prices. AES stock prices haven’t been steady this year but they are predicted to rise. The average target stock price for AES stock is $29.83, well above the $24 where it currently trades.
UGI Corporation (UGI)
UGI Corporation is an under-the-radar company that is far from a household name. But the gas utilities company is one worth considering if the economy tanks. Is the company sexy? Not at all. But it is reliable, and reliable is attractive to a certain subset of investors.
In fact, UGI Corp. is so reliable that it has paid a consecutive dividend for more than 134 years. UGI faltered in terms of share price at the onset of the pandemic. It has rebounded nicely and looks to have further to go.
The UGI stock price has increased from under $25 a share at the depth of the market crash to above $46 presently. Prices eclipsed $50 two years ago.
The company markets itself as a balanced growth and income investment. That’s exactly the kind of company that’s prepared to weather an economic downturn. The utilities sector is packed with such companies and UGI stock is a strong candidate among them.
On the date of publication, Alex Sirois 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.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.