Shares of companies that remain stable during most business cycles are defensive stocks. These stocks are reliable investments that tend to provide a hedge to investors when the market faces volatility or uncertainty. Defensive stocks come with stable dividends and earnings irrespective of the market’s performance.
Indeed, in this period of heightened volatility and uncertainty, sounds like a unicorn, no?
With the economic headwinds originating from the pandemic dissipating of late, investors have been right to take a risk-on approach over the past 2 years. However, now it seems the conversation is once again shifting in a way I haven’t seen since the onset of the pandemic. Concerns about slowing economic growth and new variants threaten the recovery thesis. Additionally, the potential for skyrocketing inflation, rising interest rates and geopolitical tensions to ratchet up, provide investors with a tremendous amount of uncertainty right now.
In the markets, uncertainty typically translates to volatility. For investors, that means more risk.
Accordingly, defensive stocks such as those in the following list may become more valuable in the near-term. These companies are each large (size is one defensive attribute I think is overlooked), and leaders in their field. These companies all have stable cash flows, and strong growth prospects moving forward.
Let’s take a look at why these top picks may be perfect for investor portfolios right now:
- Johnson & Johnson (NYSE:JNJ)
- Freeport-McMoRan (NYSE:FCX)
- Procter & Gamble (NYSE:PG)
- Pfizer (NYSE:PFE)
- Merck (NYSE:MRK)
- Costco (NASDAQ:COST)
- BP (NYSE:BP)
Defensive Stocks: Johnson & Johnson (JNJ)
As far as consumer packaged goods and healthcare plays go, Johnson & Johnson is one of my top picks. Indeed, this $400 billion market cap play on everything from consumer essentials to Covid-19 vaccines is about as defensive as its gets. For those concerned about new waves of Covid-19 derailing the market, betting on a company aiming to lessen the blow certainly seems like a prudent move.
Currently, JNJ stock is now trading well above pre-pandemic levels. That said, this stock has proven to be a cyclical one, with capital flows varying over time. The key for long-term investors looking at the stock chart of JNJ stock is to look at how this stock fails to swing wildly in any direction. There’s volatility, but it’s muted relative to the overall market.
Well, the company’s about as diversified a global giant as an investor could ask for. Johnson & Johnson is really a global conglomerate, with a supply chain that’s about as massive as any company has. Of course, various supply chain concerns can derail this stock, and inflationary pressures aren’t good. However, on balance, this is a mega-cap stock I think is worth considering during this period of uncertainty right now.
Additionally, JNJ stock yields 2.7%, and is one of a rare group of Dividend Aristocrats that has raised its dividend for more than 50 years. That’s inherently defensive, and something long-term investors should like.
The next stock on the list is one of the largest copper mining companies in the world. Freeport-McMoRan is an Arizona-based miner that primarily focuses on mining copper, gold, molybdenum and other commodities. As primarily a base metals producer with some precious metals exposure, FCX stock could be viewed as one of the most defensive miners in the market right now.
Concerned about inflation? Rising commodity prices, such as those of base metals, provide some safety. Worried about the potential for currency devaluation? Precious metals exposure handles those concerns well.
Indeed, global supply chain issues and shortages of key commodities coming out of this pandemic has put commodity related plays on watch. FCX stock has absolutely soared since the onset of the pandemic, being a 5-bagger for investors who bought near the bottom. That sort of performance is hard to come by in the commodity space, in any bull market.
However, it’s Freeport McMoran’s business model that’s largely seen as the reason for this robust growth. Given the rising demand for electric vehicles and homebuilding, copper prices have done well. Precious metals remain below their post-pandemic highs, but are still trading at above-average levels.
I think there’s still much more room to run with this bull market in commodities. Those concerned about the negative impacts of monetary policy would do well to consider a large-cap mining play right now. Accordingly, FCX stock looks like a solid pick in this respect.
Defensive Stocks: Procter & Gamble (PG)
Similar to Johnson & Johnson (without the vaccine exposure), Proctor & Gamble is one of the leading consumer goods plays on the market right now. Again, investors bullish on a steady economic recovery, but unsure as to the rate of growth in the years to come, may want to consider such stocks right now.
PG stock is one that has moved higher rather consistently in recent years. Despite various bumps in the road, this is a company that is widely viewed as a bet on the strength of the North American and global economies. Accordingly, those with a long-term perspective have been served well by holding onto shares of PG stock for extended periods of time.
Now is no different. The company’s production of daily-use items remains as defensive as ever. Indeed, Proctor & Gamble’s producers continued to be used by a majority of the global population. And as the company has streamlined its product line to approximately 80 brands, PG stock has benefited from widening margins in recent years.
As per the company’s Q4 financial results, net income stood at $2.9 billion, while the earnings-per-share came in at $1.13. This beat analyst estimates of $1.08 by a rather wide margin. Net sales also saw a 7% rise to touch $18.9 billion. This revenue growth was driven by outperformance in the company’s healthcare and beauty segment. While organic sales in the healthcare segment rose 14%, the beauty segment saw revenue growth of 6%.
Pharmaceutical giant Pfizer is another top defensive stock at the moment. PFE stock is currently trading at a price-to-earnings ratio of under 19x and a dividend yield of 3.7%, at the time of writing. For long-term investors, those are some fundamentals to latch on to.
Pfizer’s Covid-19 vaccine remains the top cash flow generator for the company. By 2021, the company estimates to generate $26 billion from sales of the company’s Covid-19 vaccine.
Pfizer is also planning to increase its vaccine production in 2022, which would further boost its revenue. That’s not all. The company offers investors a robust pipeline of drugs that are in clinical trial phases right now. Pfizer expects to increase its revenue by 6% by 2025 with these drug sales alone, excluding the Covid-19 vaccine.
The mega-cap pharma company provides healthy cash flows which ensures the dividend yield remains substantial. Pfizer is investing around $9 to $10 billion in research and development that will drive its growth in the future.
Defensive Stocks: Merck (MRK)
Another pharmaceutical juggernaut to make the list is Merck.
Like Pfizer, Merck is a Pharma giant with the potential to provide portfolio stability during this time of uncertainty. A traditionally stable sector from a cash flow perspective, pharmaceutical players are often looked at as core portfolio holdings for a reason.
Merck’s portfolio of drugs focused on various forms of cancer and infectious diseases will always produce impressive cash flows. The company’s key Keytruda antibody treatment for cancer, continues to be a key source of income.
However, investors in MRK stock are increasingly focused on a new Covid-19 oral monoclonal antibody treatment for Covid-19. Upon announcing this treatment, shares of MRK stock took off in impressive fashion.
Regardless of whether this drug is successful, I view Merck’s product pipeline as impressive. This is also a company with an impressive dividend yield of 3.2%, making this an impressive total return play over time.
Costco Wholesale (COST)
One retail stock I’ve thought is perhaps the best in the market in recent years is Costco. This big box retailer has some of the best fundamentals of its peer group. Additionally, this is a stock that has found ways to increase margins over time, something competitors have had difficulty doing.
Granted, the recent supply chain issues plaguing the market may slow down this margin expansion potential for some time. However, I think over the long-term, Costco’s membership base and potential for margin growth remain intact. The company’s Q3 earnings report reveals that Costco has total household membership of 60.6 million. Membership fees remain a robust source of income for the company. Currently, the company boasts and impressive 91% renewal rate in the U.S. and Canada in this regard.
This is one of the few retailers that saw sales growth during the pandemic. The company’s model has shown robustness in previous crises, leading me to believe there’s a defensive moat around this company unlike the vast majority of retailers in the market.
Accordingly, I view this low-beta stock as one of the best defensive stocks with a growth tilt.
Defensive Stocks: BP (BP)
Finally, we have an energy player. U.K.-based BP is one of the more defensive stocks in the energy sector, one which has been on a very wild ride in recent years. The pandemic had absolutely pummeled energy stocks last year. However, rising energy demand coupled with supply chain issues have provided for an impressive rebound for BP stock.
That said, unlike many of its peers, BP stock remains well below pre-pandemic levels. Accordingly, this is perhaps the least-defensive stock on the list. That said, I view BP as more of a higher-risk, higher-reward long-term core holding for investors to consider right now.
Those bullish on a strong global recovery coming out of this pandemic get a great amount of leverage to this trend with BP. This company’s exposure to energy prices remains high, making this a stock that should perform well with oil trading at levels not seen in 12 years.
Additionally, BP has been making a shift toward renewable energy. The company recently announced plans to invest around $60 billion into renewable energy development over the next decade. That’s a substantial chunk of change.
Accordingly, long-term investors looking for a more risky, but defensive, play may want to consider BP stock right now.
On the date of publication, Chris MacDonald 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.