3 Defensive Stocks to Buy As They Climb to New Heights

  • Costco (COST) shares just completed a textbook bull retracement pattern.
  • Walmart (WMT) stock finally blasted through the top-end of its year-long trading range.
  • Coca-Cola (KO) notched a new 52-week high and still boasts a dividend yield just shy of 3%.
a hand drawing umbrellas covering money from rain

Source: Shutterstock

Defensive stocks are all the rage these days, and the reason is simple. Inflation and its dramatic impact on interest rates are spooking investors. But rather than flee equities completely, they’re simply shifting from offense to defense. Expensive, high beta growth stocks are out. Low volatility, stable dividend payers are in. I found three stocks to buy that check all the right boxes and are in favor right now.

My search took me into all the classic defensive sectors, including healthcare, consumer staples and utilities. Multiple uptrends grabbed my attention, but the consistency of staples spoke the loudest. Many have business models that are recession-proof, which is comforting in an environment where many are concerned the Federal Reserve might torpedo the economy in their attempt to whip inflation.

Today’s trio all pay dividends, so if their recent momentum ebbs, you’ll still be getting paid while you wait.

Ticker Company Current Price
COST Costco $594.57
WMT Walmart $157.49
KO Coca-Cola $65.55

Costco (COST)

Dividend Yield: 0.53%

Costco (COST) stock chart with bull retracement.

Source: The thinkorswim® platform from TD Ameritrade

Costco Wholesale (NASDAQ:COST) has been a juggernaut for years, but its momentum went into overdrive following the pandemic. By year’s end, the superstore saw its share price balloon 50% for 2020. While it stumbled at the beginning of this year alongside the rest of the stock market, it has since separated itself and climbed to a new record.

Volume spiked last week when prices pierced $600, and we’ve since seen a gradual three-day pullback with declining participation. The retreat had all the markings of a dip worth buying. Even if we were to fall further, the rising 20-day and 50-day moving averages are rising beneath and should play a supportive role.

The lofty price tag makes long calls an expensive proposition. To lower the cost, consider buying call vertical spreads.

The Trade: Buy the May $600/$615 bull call spread for $5.30.

You’re risking $5.30 to make $9.70 if COST stock is above $615 by expiration.

Walmart (WMT)

Dividend Yield: 1.42%

Walmart (WMT) stock chart with bull retracement setup.

Source: The thinkorswim® platform from TD Ameritrade

Compared to Costco, Walmart’s 2020 was lame. It ended the year essentially unchanged, but there is a silver lining. It allowed the retail giant to build a long-term base to break from. For months, $150 was a graveyard where rallies went to die, and the consumer staples king lacked sufficient momentum to spark a new uptrend.

Until now.

Last week’s ramp saw WMT stock finally crack resistance and push to an all-time high. The volume patterns have been extremely constructive, with accumulation days far outpacing any signs of distribution. Even after rocketing from $142 to $158 in a straight line, prices still couldn’t fall for more than two sessions before buyers returned.

I wouldn’t be surprised if the upward trajectory slows, but there’s no denying Walmart is attracting a lot of attention right now. Here’s an easy bet to double your money.

The Trade: Buy the May $155/$160 bull call spread for $2.50.

The max loss is $2.50, and the max gain is $2.50. All WMT needs to do is close above $160 in a month.

Coca-Cola (KO)

Dividend Yield: 2.72%

Coca-Cola (KO) stock chart with strong uptrend.

Source: The thinkorswim® platform from TD Ameritrade

If you’re seeking cash flow and steady price appreciation, then Coca-Cola tops the list of stocks to buy. What it lacks in momentum, it makes up for in predictable dividend growth. But thanks to investors’ newfound love of the consumer staples sector, KO is actually rising sharply. In fact, Monday’s close of $64.73 was a record high.

Its moving averages are climbing higher to confirm buyers’ dominance across all time frames. The looming earnings announcement on April 25 could inject some volatility into the share price, but these quarterly reports haven’t historically created too much disruption.

If the idea of buying shares for a long-term hold doesn’t scratch your speculative itch, then here’s a spread that creates a leveraged bet.

The Trade: Buy the Aug $60 call, while selling the May $67.50 call for a net debit of $5.50.

This builds a bull call diagonal spread that could gain up to $200 if KO rises to $67.50 over the next month.

On the date of publication, Tyler Craig was LONG KO.

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Article printed from InvestorPlace Media, https://investorplace.com/2022/04/3-defensive-stocks-to-buy-as-they-climb-to-new-heights/.

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