3 Defensive Plays Going on the Offensive

Sometimes the best offense is a good defense.

With the U.S. stock market slipping into bear market territory, 2022 is looking more and more like the year of the defensive stock. 

Sectors known to lag during periods of economic prosperity but hold up well during economic downturns have been shining stars in an otherwise dim year for equities. A bevy of consumer staples, utility, and telecommunications names are currently playing the role of market leaders. Perennial leaders like technology and consumer discretionary companies continue to be distant laggards.

Some stocks are taking things to another level. It’s one thing to outperform in a down market by posting less negative returns. It’s another to flip the script and emerge above water when most are drowning. 

Reminiscent of a pick-six in football, a handful of consumer staples stocks are showing that the defense can put up points too. Not satisfied with merely being ‘less in the red’, these three defensive names are up 10% or more year-to-date—and may keep carrying their offensive S&P teammates well into the second half.

Is Dollar Tree a Good Defensive Stock? 

Dollar Tree, Inc. (NASDAQ: DLTR) is up 11% this year, although it was only last month that the discount retailer re-emerged from the red. That’s when it reported excellent Q1 results highlighted by a 48% surge in profits, which handily beat the Street’s expectation. 

More importantly, it demonstrated that the Dollar Tree’s new $1.25 price point is being accepted by shoppers and boosting margins. Despite the relentless climb in freight costs, the gross margin expanded from 30.3% to 33.9%. This makes Dollar Tree stand out in a retail industry struggling with inflationary pressures and shrinking profitability. 

While a foe for most retailers, inflation could continue to be a friend for Dollar Tree. Consumers are looking for more ways to stretch the dollar these days, making discounted national brand products more attractive. So too are smaller package sizes which don’t last as long but help some shoppers bridge the gap to the next paycheck. 

With more than 15,000 Dollar Tree and Family Dollar locations across the continental U.S., this is one variety store that is likely to be relevant to many as inflation stays stubbornly high. It’s just a matter of time before the stock climbs the tree to a new record. 

Will Molson Coors Beverage Company Do Well in a Recession?

After an up and down 2021, Molson Coors Beverage Company (NYSE:TAP) is up 10% so far in 2022. No one told the beer maker that the economy could be moving towards a recession. Even if they did, it may not matter.

Beverage companies and alcoholic beverage companies in particular tend to perform well regardless of the economic environment. Although recessions typically come with reduced demand from restaurants and event managers, beer drinkers’ consumption habits don’t change much when times get tough. In reference to the impact of inflation on Americans’ beer budgets, AB InBev CEO Michel Doukeris recently noted that “consumer demand in the U.S. has proven to be resilient”.

Paying an extra buck or two for a 12-pack doesn’t seem to be an issue at Molson Coors either. Sales rose for the fourth straight quarter in Q1 led by strength in core brands like Coors Light and Miller Light. Lessened restrictions at restaurants and bars were also a boon to the company’s sales in Europe, where a pint of Carling was a popular bartender request.

Although input and transportation costs are expected to weigh on performance, management maintained an upbeat outlook for the rest of the year. This speaks to an ability to pass along higher costs to the consumer and the strength of its expanding beer and non-beer lineup.

Molson Coors still has a long road ahead to get back to being a $100 stock. But given the momentum in business, there could be some sizable long-term gains on tap.

Is Kroger a Good Stock to Own in This Market?

The Kroger Co. (NYSE:KR) is the epitome of a defensive grocery store investment. The stock is up 12% in a year in which the S&P 500 is down more than 20%. It has been a safe haven of sorts because investors recognize that no matter how persistent inflation is, people need to eat. So while consumers are grumbling about higher grocery bills, there’s not much that can be done. 

One action shoppers can take is to rotate to less expensive generic brands. This plays right into Kroger’s hands. Expanding its assortment of private label products is a major strategic focus at the company. And since these items have higher profit margins, this is helping ease the burden of higher wage and freight expenses. Sales of Kroger private label brands accounted for approximately 20% of overall sales last year.

This is a big reason why profits were up last year and are expected to be up again this year. The Street is projecting 9% earnings growth in the current fiscal year. Ordinarily, this wouldn’t be anything to get too excited about, but in the current economic climate, it sounds quite good—and is why Kroger will be a relatively safe name to own for the foreseeable future. 

On Thursday (June 16th) investors will learn more about how Kroger’s year is going when it reports first quarter results. If it exceeds EPS estimates yet again, look for the stock to get a price check and head back toward $60.