- High-quality stocks like these have the balance sheets, moats and management to hold up even when the market is tumbling.
- Anthem (ANTM): The pandemic was a boon to ANTM stock, and it’s looking for over 10% revenue and EPS growth this year.
- Pfizer (PFE): Pfizer has a strong earnings outlook and a history of blockbuster drugs.
- Builders FirstSource (BLDR): A booming housing market should keep Builders FirstSource on an upward trajectory.
The near-term market outlook remains cloudy. While the S&P 500 is slightly above its late-February lows, the Nasdaq and Russell 2000 have already undercut these levels. Further, there is little sign of relief, especially with the Federal Reserve’s hawkishness.
There are also many risks such as raging inflation, the war between Russia and Ukraine, shutdowns in China and concerns that the economy could be slowing just as the Fed is embarking on a tightening cycle. In this kind of environment, investors have to be extremely judicious when picking stocks.
The best candidates are those with strong balance sheets and attractive valuations whose earnings and revenue are disconnected from economic or monetary factors. The silver lining of volatile market conditions is that such high-quality stocks can be bought at a discount.
Below are three such high-quality stocks that investors should consider buying during this market correction.
Anthem (NYSE:ANTM) is a managed care company, providing medical benefits to roughly 44 million members. It offers employer, individual and government-sponsored plans. It is also the largest single provider of Blue Cross Blue Shield branded coverage. This sector has also been particularly strong due to a very low unemployment rate, which means that the company has seen strong growth in enrollees.
Further, the pandemic was a boost to its bottom line as fewer people were going to the doctor and undergoing procedures. Therefore, the company’s payouts declined.
Many analysts had been expecting an above-average reading as the economy normalized, but so far this has simply returned to pre-pandemic levels.
Another reason to like managed-care stocks is their pricing power, as healthcare spending tends to rise at a faster pace than inflation. And, they tend to be less affected by economic slowdowns. Currently, the company is seeing growth from its Medicare Advantage plans and virtual care services.
Last year, the company had $25.98 in EPS and $136.9 billion in revenue. This year, analysts are forecasting $28.61 in EPS and $153.8 billion in revenue, increases of 10.1% and 12.3%, respectively. And, they see more growth in 2023 – 13.4% for EPS and 5.2% for revenue.
With these attributes, it’s not surprising that ANTM has an overall grade of A, which translates into a “strong buy” rating in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also evaluates stocks by select factors to generate component grades to give investors more insight. ANTM has a B for Sentiment, as 14 out of 17 Wall Street analysts covering the stock have a buy rating with a consensus price target implying 13% upside. ANTM is ranked No. 1 in the B-rated Medical – Health Insurance industry. For more top stocks in this industry, click here.
Pfizer (NYSE:PFE), the second of our high-quality stocks, is one of the world’s top pharmaceutical companies. This sector has also outperformed in recent months as its revenues and earnings are largely disconnected from economic growth or changes in monetary policy. Further, it has heavy pricing power over drugs that are under patent and a strong balance sheet with low debt and $30 billion in cash and short-term investments.
PFE has also demonstrated the ability to constantly develop and bring to market blockbuster drugs. The most recent and well-known is its key role in the development of Pavlaxoid to treat Covid-19 patients.
In 2021, the company earned $4.42 in EPS and $81.3 billion in revenue. This year, analysts are forecasting $7.15 in EPS and $108 billion in revenue. These equate to very impressive growth rates of 62% and 33%.
Despite such strong growth, the stock is quite cheap with a forward price-earnings ratio of 7.2.
PFE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to “strong buy” in our proprietary rating system. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500’s annual performance of 8%.
In terms of component grades, PFE has a B for Quality due to its strong balance sheet, above-average margins, and well-regarded management team. It also has a B for Value due to its P/E being half of the S&P 500 despite faster growth and bigger margins. For PFE’s complete POWR Ratings, click here.
Builders FirstSource (BLDR)
Another trend in high-quality stocks that is likely to remain strong even amidst these bearish headwinds is the housing market. It’s certainly possible that higher mortgage rates could slow its momentum, but the underlying supply and demand fundamentals remain supportive. Essentially, there is a demographic bulge as Millennials enter their 30s and 40s, while the supply of available housing is quite low relative to historical averages.
This bodes well for companies like Builders FirstSource (NYSE:BLDR) which is a producer and supplier of building materials. It primarily sells to homebuilders, contractors, remodelers, and construction companies. Some of its major products are dimensional lumber and lumber sheet goods, millwork, windows, interior and exterior doors, and other building products. It also offers construction-related services such as professional installation, turn-key framing, and shell construction, spanning all its product categories.
What’s interesting about BLDR (and many stocks in the housing sector) is that they have experienced sharp pullbacks due to rising rates and fears of a potential slowdown in the economy. This is reflected in Builder’s valuation which shows a forward P/E of 6.9.
This type of valuation means that investors are expecting some sort of contraction in earnings. However, there’s no indication of this in its earnings report as the company had an 81% increase in net sales and a 190% gain in operating income.
BLDR’s low valuation means that it can deliver stellar returns for investors by continuing to deliver solid earnings growth. One potential catalyst is for the Fed to hike at a slower pace than what is expected by the market. Another is that inflationary pressures could ease which could lead to higher margins and revenues.
BLDR’s POWR Ratings are consistent with this combination of deep value and earnings growth. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s average annual 8% gain.
It’s also quite strong in terms of component grades. The stock has an A for Growth as revenues and EPS have climbed by 158% and 508% over the last 2 years. Next year, Wall Street analysts are projecting a year of consolidation with 1% revenue growth and a 9% drop in EPS.
However, if the housing market can defy skeptics with its resilience, then BLDR could have major upside, especially with valuations so low. Click here to see additional POWR Ratings for BLDR.
On the date of publication, Jaimini Desai did not have (either directly or indirectly) 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.
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