Written by 7-defensive-stocks-to-buy-on-market-jitters
July 23, 2021
Defensive stocks are companies that deliver consistent revenue and earnings regardless of what is happening in the broader economy. This has the effect of allowing these stocks to outperform the market when the economy is in a downturn. But it also means that these stocks are frequently overlooked during bull markets.
After all, for many investors, particularly younger investors, but the benefit of capturing a dividend is far down on their list of priorities. But it’s specifically their ability to serve as a hedge against volatility that makes defensive stocks worthy of consideration in every portfolio.
One characteristic of defensive stocks is they have a high percentage of institutional ownership. These institutions (hedge funds, large investment banks, mutual funds, etc.) are frequently referred to as the “smart money.” By putting their money into these companies it’s a sign that the company is financially sound and likely to perform well.
Defensive stocks can be found in many sectors. In this presentation, we’re giving you one pick from various sectors.
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- Verizon
- Chewy
- UnitedHealth Group
- General Mills
- General Electric
- Coca-Cola
- McDonald’s
#1 - Verizon (NYSE:VZ)
If I was putting this list together a year ago, I would have put AT&T (NYSE: T) ahead of Verizon (NYSE: VZ) on this list. Why? Because I was buying into the “sum of its parts” argument that went with T stock. However, with AT&T’s recent decision to spin-off its WarnerMedia division, and the corresponding dividend cut when that deal is complete, I’ll slide Verizon here as a pure-play telecommunications stock.
5G will continue to be the catalyst for Verizon and the company has spent big recently. However, with approximately $150 billion in debt, the company is in a strong financial position. And Verizon’s dividend is already comparable to AT&T. So when AT&T cuts its dividend, Verizon will be a better value.
But the stock has more going for it than just its dividend. Analysts are forecasting that the stock has an upside of around 11%. That would be welcome news for investors who have held onto the stock for five years despite little to no growth to show for it.
About Verizon Communications
Verizon Communications Inc, through its subsidiaries, engages in the provision of communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. It operates in two segments, Verizon Consumer Group (Consumer) and Verizon Business Group (Business).
Read More - Current Price
- $39.93
- Consensus Rating
- Hold
- Ratings Breakdown
- 8 Buy Ratings, 10 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $46.51 (16.5% Upside)
#2 - Chewy (NYSE:CHWY)
Chewy (NYSE: CHWY) may seem like an odd addition to a list of defensive stocks. However, that’s only because CHWY stock has only been publicly traded for a couple of years. The pandemic accelerated the company’s growth as its e-commerce model became an essential way for pet owners to buy food, toys, treats, and medication for their pets.
That has caused the stock to behave like a growth stock. In the last 12 months, CHWY stock is up more than 75%. However, in 2021, the stock is down 6%. But this is not because the company’s growth is slowing. In fact, the company has turned a profit in the last two quarters and it has grown revenue on a quarterly basis every quarter since going public.
I’m not claiming it will pay a dividend anytime soon. But the company’s core business is the definition of a defensive business model. Pet owners will continue to ensure their pets are cared for regardless of economic conditions. And Chewy facilitates that behavior.
About Chewy
Chewy, Inc, together with its subsidiaries, engages in the pure play e-commerce business in the United States. It provides pet food and treats, pet supplies and pet medications, and other pet-health products, as well as pet services for dogs, cats, fish, birds, small pets, horses, and reptiles through its retail websites and mobile applications.
Read More - Current Price
- $33.72
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 9 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $34.60 (2.6% Upside)
#3 - UnitedHealth Group (NYSE:UNH)
If pet wellness isn’t your thing, maybe you’ll be interested in human wellness. Health care stocks are generally good defensive stocks. With that in mind, my choice for this sector is UnitedHealth Group (NYSE: UNH).
It’s no secret that health insurance stocks dropped during the pandemic. For example, non-essential surgeries were postponed. That recovery is coming back strongly. And temporarily, the higher costs are eating into UnitedHealth’s profits.
If you’re part of the “what have you done for me lately?” crowd, UnitedHealth just reported a double beat when they reported earnings in July. And it also recently entered into a partnership with Peloton (NASDAQ: PTON) in which Peloton will provide free year-long access to Peloton classes for all eligible members.
UNH stock is up about 18% in 2021 which is slightly outpacing the S&P 500 Index. And a dividend of 1.4% is not that impressive, but it currently outpaces a 10-year Treasury note.
About UnitedHealth Group
UnitedHealth Group Incorporated operates as a diversified health care company in the United States. The company operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx. The UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, and individuals; health care coverage, and health and well-being services to individuals age 50 and older addressing their needs; Medicaid plans, children's health insurance and health care programs; and health and dental benefits, and hospital and clinical services, as well as health care benefits products and services to state programs caring for the economically disadvantaged, medically underserved, and those without the benefit of employer-funded health care coverage.
Read More - Current Price
- $500.13
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 19 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $626.84 (25.3% Upside)
#4 - General Mills (NYSE:GIS)
It’s not surprising that consumer staples companies make for strong defensive stocks. And General Mills (NYSE: GIS) is one of the best-in-class among these companies. The company is perhaps best known for its cereal brands including Cheerios.
But the company has expanded into many other convenience foods including its recent purchase of Blue Buffalo Pet Products. The $8 billion acquisition gives the company a foothold in one of the strongest growth drivers for the next decade.
Despite a surge in the stock as consumers stocked their pantries during the pandemic, GIS stock is down 10% in the last 12 months. However, the stock has been essentially flat in 2021. This is significant because the company has continued to post strong revenue and earnings at a time when many investors were concerned that revenue would decline.
However, analysts are projecting a 10% gain in the stock over the next 12 months. However, the company rewards shareholders with its dividend. It has raised the dividend in nine of the last 10 years and has what is considered one of the safest dividends in the industry.
About General Mills
General Mills, Inc manufactures and markets branded consumer foods worldwide. The company operates through four segments: North America Retail; International; Pet; and North America Foodservice. It offers grain, ready-to-eat cereals, refrigerated yogurt, soup, meal kits, refrigerated and frozen dough products, dessert and baking mixes, bakery flour, frozen pizza and pizza snacks, snack bars, fruit and savory snacks, ice cream and frozen desserts, unbaked and fully baked frozen dough products, frozen hot snacks, ethnic meals, side dish mixes, frozen breakfast and entrees, nutrition bars, and frozen and shelf-stable vegetables.
Read More - Current Price
- $63.61
- Consensus Rating
- Hold
- Ratings Breakdown
- 4 Buy Ratings, 12 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $71.56 (12.5% Upside)
#5 - General Electric (NYSE:GE)
One distinguishing feature of a defensive stock is that they are usually cash-generating machines. That wasn’t a statement that would have been attributed to General Electric (NYSE: GE) in recent years. But with the hiring of Larry Culp as the company’s CEO, the company is prioritizing cash flow. It was a strategy that Culp used when he held the same title at Danaher (NYSE: DHR). And under Culp’s leadership, the company preserved $3 billion of cash as it weathered the pandemic.
However, cash preservation wasn’t Culp’s only goal. For many years, General Electric had run far afield in terms of its core businesses. Culp has helped streamline the company’s operations. And while its largest business is power turbines, it’s also involved in the health care sector. And that’s why the company is making this list.
GE stock is up over 80% in the last 12 months and is still going strong in 2021. The stock is up 21% for the year, outpacing the S&P 500 index over the same period.
About General Electric
General Electric Company, doing business as GE Aerospace, designs and produces commercial and defense aircraft engines, integrated engine components, electric power, and mechanical aircraft systems. It also offers aftermarket services to support its products. The company operates in the United States, Europe, China, Asia, the Americas, the Middle East, and Africa.
Read More - Current Price
- $168.37
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $201.93 (19.9% Upside)
#6 - Coca-Cola (NYSE:KO)
The perpetual debate between Coca-Cola (NYSE: KO) and Pepsi (NASDAQ: PEP) extends into their role as favored defensive stock. Strictly based on financials, I could make a strong case for PEP stock. However, the company is currently the target of a class-action lawsuit regarding working conditions at one of its plants.
It’s unlikely that this will be a long-term headwind for the stock. However, when there are other options to choose from, I’ll go with them. And let’s face it, it’s not like KO stock is a bad choice. The company has been expanding into other beverage categories. That progress was stalled a bit due to the pandemic, but if the company’s recent earnings report is any indication, Coca-Cola will be just fine.
The company’s performance in the last year has been just okay. It’s up 16% in the last 12 months. However, investors (such as Warren Buffett) invest in Coke, in large part, for its dividend. And here the company continues to deliver as it has for the last 59 years.
About Coca-Cola
The Coca-Cola Company, a beverage company, manufactures, markets, and sells various nonalcoholic beverages worldwide. The company provides sparkling soft drinks, sparkling flavors; water, sports, coffee, and tea; juice, value-added dairy, and plant-based beverages; and other beverages. It also offers beverage concentrates and syrups, as well as fountain syrups to fountain retailers, such as restaurants and convenience stores.
Read More - Current Price
- $62.55
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $72.50 (15.9% Upside)
#7 - McDonald’s (NYSE:MCD)
The last of the defensive stocks on this list is McDonald’s (NYSE: MCD). The iconic fast-food chain was working to develop the digital side of its business. And that paid off in a big way during the pandemic. MCD stock soared as the company kept its drive-thru windows open and the revenue followed.
That growth stalled in the first part of the year, but the stock has broken to a new record high since the company reported earnings in July. The company recently announced that it was going to be increasing employee pay from $11 to $17. This should help the company attract workers as it looks to open its dining room which remains mostly shut as of this writing.
And if investors needed a different reason to take a bite out of McDonald’s stock, they can look at the company’s dividend, which the company has increased in each of the last 45 years.
About McDonald's
McDonald's Corporation operates and franchises restaurants under the McDonald's brand in the United States and internationally. It offers food and beverages, including hamburgers and cheeseburgers, various chicken sandwiches, fries, shakes, desserts, sundaes, cookies, pies, soft drinks, coffee, and other beverages; and full or limited breakfast, as well as sells various other products during limited-time promotions.
Read More - Current Price
- $292.68
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 17 Buy Ratings, 11 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $320.65 (9.6% Upside)
A strategy to buying defensive stocks is to buy them before you need them. With the way the stock market is moving at the moment, it may be easy to think that it’s too late to buy defensive stocks. The Dow swung 900 points to the downside on July 19 only to recover all those losses, and then some, in the next 48 hours.
And yet, you can’t blame investors for feeling a little uncertain about a market that by many accounts is highly overvalued. Whenever the market does lurch downward, it’s only natural for investors to wonder if this is the start of a stronger correction.
We can’t say when that will occur.
That’s a risk that every investor has to manage for themselves. One way to manage the risk is to invest in defensive stocks that will act as a hedge in your portfolio. And if you’d rather mitigate your risk even further, you can look at an exchange-traded fund (ETF) that tracks the S&P 500 index such as the Vanguard 500 Index Fund ETF (NYSEARCA:VOO).
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