The United States faced a major debt limit stand-off in 2011. Between July and October of that year, the S&P 500 Index slumped by 18%. It goes without saying that markets don’t like uncertainties. As the U.S. stares at another stand-off related to the debt ceiling, it’s a good time for some portfolio adjustment. I would look at stocks to buy that can help in capital preservation in a market downside scenario.
It’s worth noting that the Congress has agreed to a short-term increase in the U.S. debt ceiling. For now, this will help in averting a national default.
However, the fix is temporary.
Mark Hamrick, senior economic analyst at Bankrate.com, points out that “it would be inappropriate to characterize this as a successful resolution.” Hamrick also believes that the uncertainty is likely to continue.
Therefore, it might be too early to celebrate. The markets are also staring at a potential tapering by the Fed. Additionally, Atlanta Federal Reserve President Raphael Bostic opines that inflation is unlikely to be “transitionary.” If inflation lasts longer and accelerates, there is a strong case for earlier than expected rate-hike. Given these factors, the markets are likely to remain nervous.
With all of that in mind, let’s talk about seven stocks to buy on a possible debt-ceiling standoff slump.
- British American Tobacco (NYSE:BTI)
- Starbucks (NASDAQ:SBUX)
- Coca-Cola (NYSE:KO)
- Caterpillar (NYSE:CAT)
- ABB (NYSE:ABB)
- Costco Wholesale (NASDAQ:COST)
- Procter & Gamble (NYSE:PG)
Now, let’s dive in and take a closer look at each one.
Stocks to Buy: British American Tobacco (BTI)
At a forward price-earnings ratio (P/E) of 7.9, BTI stock looks grossly undervalued. Considering the expected market volatility, the low-beta stock with a dividend yield of 8.3% is among the top stocks to buy.
British American is in a phase of business transformation and the initial response seems positive. As of the second quarter of 2021, the company had 16.1 million non-combustible product consumers.
In a major news, the company announced an approval from the U.S. Food and Drug Administration to sell its Vuse Solo e-cigarette. Approval is also granted for associated tobacco-flavored pods. In turn, this is likely to further boost the company’s non-combustible segment growth.
At the same time, the combustible segment continues to be the cash cow. For the rest of 2021, British American has guided for 5% revenue growth with improved global combustibles volume outlook. Emerging market recovery is a key driver of volume growth.
Therefore, the company is positioned to utilize the cash flow from the combustible segment to drive growth in the new business. British American has also guided for a 65% dividend payout ratio. And with robust free cash flows, current dividends seem sustainable.
Overall, BTI stock already looks undervalued. Even if the stock stays sideways, a dividend yield of 8.3% is attractive. However, I do expect stock upside in the coming quarters as the non-combustible segment growth accelerates.
SBUX stock is another attractive low-beta stock to consider for a potential market correction. Recently, the company increased dividends by almost 9% and the stock currently offers an annualized dividend of $1.96.
Recently, Bank of America analyst Sara Senatore reinstated coverage on SBUX stock with a price target of $135. Sara points out that “growth in the specialty coffee segment continues to outpace that of overall food service globally and in the US.” The $135 price target would imply a potential upside of 22% from current levels of $113.
In terms of growth, Starbucks opened 352 new stores in Q3 2021. For the full year, the company expects to open 2,150 stores. Another important point to note is that stores in U.S. and China comprise 62% of the company’s global portfolio. Therefore, there is ample scope for growth in other emerging markets.
It’s also worth noting that for the first nine months of 2021, Starbucks reported $4.5 billion in operating cash flows. Additionally, the company has a cash buffer of $4.8 billion. Therefore, there is ample financial flexibility to pursue aggressive store opening in the coming years.
Overall, SBUX stock has trended higher by just 5.8% for year-to-date (YTD). A breakout on the upside seems impending in the coming quarters.
Stocks to Buy: Coca-Cola (KO)
KO stock is another name among stocks to buy in anticipation of market volatility and correction. While low-beta is a basic screener, KO stock looks attractive considering a dividend yield of 3.1%.
In the recent past, Coca-Cola has optimized its brand portfolio from 400 to 200 master brands. This includes nutrition, juice, hydration and sports brands.
With increasing health awareness, the company has been making an entry into high-growth segments. As an example, the company’s nutrition, juice, dairy and plant-based beverages witnessed 25% growth for Q2 2021.
With a strong brand portfolio and ample scope for growth in emerging markets, Coca-Cola is targeting long-term organic revenue growth of 12% to 14% for FY2021. Furthermore, the company expects earnings per share (EPS) growth in the range of 13% to 15%.
Considering this growth outlook and the free cash flow potential, KO stock is attractive. For the first half of 2021, the company reported $5.5 billion in operating cash flows. Furthermore, the company expects to deliver free cash flow of at least $9 billion for 2021.
As of Q2 2021, organic revenue from Asia Pacific grew 20% and 22% from Latin America. So, with ample scope for penetration in these markets, the long-term outlook seems bullish.
From 52-week highs of $246.69 in May 2021, CAT stock has declined to current levels of $198. At a forward P/E of 15.8, CAT stock looks attractive and also offers a dividend yield of 2.23%. Importantly, the stock is also among the low-beta stocks.
It’s worth noting that the $1 trillion infrastructure bill has seen some delays. This is one reason for weakness in CAT stock. However, President Joe Biden has reiterated that the bill will be passed.
UBS estimates that “each $100 billion of incremental development spending within the U.S. might add 60 cents to Caterpillar’s earnings per share.” Clearly, the infrastructure bill is a big catalyst for a reversal rally in the stock. Even if the broad market sentiment is weak.
An important point to note is that for Q2 2021, Caterpillar reported revenue of $12.9 billion. On a year-over-year (YOY) basis, revenue increased by 29%. Furthermore, for the comparable period, the company’s order backlog swelled by $5.5 billion. This provides cash flow visibility for the coming quarters.
On the flip-side, Caterpillar derives nearly 25% of revenue from Asia Pacific. In particular, China is the key revenue driver. With the Evergrande crisis and China’s curbs on steel production, there is likely to be a negative impact. However, this is largely factored in the stock decline.
Stocks to Buy: ABB (ABB)
ABB stock is another low-beta name with a healthy dividend yield of 2.53%. With strong quarterly numbers and a robust guidance, it also seems that ABB stock will trend higher from current levels.
ABB is also interesting with the company making inroads in some high-growth segments. Recently, the company launched the world’s fastest electric car charger, which can deliver 100km of range in less than three minutes.
The company has also joined hands with PERIC Hydrogen Technologies to develop “the future of efficient hydrogen generation technology.” Another high-growth area that ABB has been expanding into is autonomous mobile robots. The acquisition of ASTI Mobile Robotics Group is likely to help in making further inroads in this segment.
An important point to note is that for Q2 2021, the company reported a total order backlog of $8.0 billion. YOY, the order backlog accelerated by 32%. A strong backlog provides clear cash flow visibility.
From a cash flow perspective, ABB reported operating cash flow of $663 million for Q2 2021. With healthy cash flows, a strong balance sheet cash buffer and low leverage, ABB has strong credit metrics. Dividends are therefore sustainable and ABB is likely to pursue further inorganic growth.
Costco Wholesale (COST)
COST stock has witnessed a decent rally in the last six-months. During this period, the stock has trended higher by 24%. However, with a beta of 0.64, the stock is among the top stocks to buy for a conservative portfolio.
Retail spending is a key driver of economic growth and with an approaching holiday season, COST stock is interesting. It’s worth noting that Costco has been reporting strong comparable sales growth. For the retail month of September, the company reported sales of $19.5 billion. YOY, sales accelerated by 15.8%.
As of Q4 2021, Costco reported 61.7 million household members. This helped in generating $3.9 billion in membership income. With a 91.3% renewal rate. Membership fee is a steady source of cash flow. Importantly, as Costco expands in markets like China, membership fee is likely to swell in the coming years. As of Q4 2021, Costco had just one warehouse in China as compared to 564 in the United States and 105 in Canada.
COST stock is also worth holding for income investors. Currently, the stock offers an annualized dividend of $3.16. It’s likely that dividends will grow considering the company’s sustained comparable sales growth.
Stocks to Buy: Procter & Gamble (PG)
PG stock has been an underperformer in the last 12 months. At a forward P/E of almost 24, the stock looks attractive after an extended period of consolidation. Also, the stock has a low beta, which makes it worth holding in uncertain times for the market.
Recently, JP Morgan listed Procter & Gamble and Estee Lauder (NYSE:EL) among the top earnings picks from the U.S. Household & Personal Care sector. If Procter & Gamble can deliver decent numbers even with the supply chain and cost pressure headwinds, the stock is likely to breakout on the upside.
It’s also worth noting that even with the headwinds, Procter & Gamble reported organic sales growth of 6% in the last two years.
Additionally, core EPS growth during these two years has been over 10%. For the current financial year, the company has targeted $8 billion in dividends and $7 billion to $9 billion in share repurchase. Therefore, free cash flow is likely to remain robust.
Overall, PG stock looks attractive with a focused portfolio and strong cash flow visibility. With emphasis on innovation and supply chain improvement, the company is likely to remain a long-term value creator.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with focus on the technology, energy and commodities sector.