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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| December 14, 2018
Market sentiment looks like it will ring in the new year with a grouchy disposition. For 2019, portfolio-building strategies are increasingly focusing on defensive stocks.
And why not? There are a host of headwinds facing stocks as we head into the new year, be it high share prices, interest rates, slowing economic growth across the world or trade uncertainty, among other negative factors.
“For equity investors, risk is high and the margin of safety is low because stock valuations are elevated compared with history,” Goldman Sachs Chief Equity Strategist David Kostin recently told investors.
No wonder defense is in. Companies from sectors such as health care and consumer staples offer goods and services that people need no matter what the economy is doing, which leads to more reliable revenues and profits. Still, even outside those sectors, there are a few resilient blue chips that either dominate their market so completely or offer such diversified product lines that they can hang in most market environments. These are the kinds of stocks investors want to pile into.
Here are seven “Strong Buy” defensive stocks to buy as we head into 2019. We used TipRanks’ Stock Screener to pinpoint “safer” stocks that Wall Street’s analyst community is overwhelmingly bullish on at the moment. Just remember: No stock is completely insulated from broad-market downdrafts, including these. But all seven should broadly stand up well during a longer-term period of instability.
Data is as of Dec. 13, 2018.
Market value: $28.0 billion
Dividend yield: 1.1%
TipRanks consensus price target: $120.57 (14% upside potential)
TipRanks consensus rating: Strong Buy
Dollar General (DG, $106.16) is a leading U.S. discount retailer with more than 14,300 stores. And to give you an example of its resiliency, it’s actually up 12% versus a broadly down market, even on the heels of a weak third-quarter report. Earnings did improve by an impressive 36% year-over-year, to $1.26 per share. But that came in just under the consensus estimate of $1.27, largely because of hurricane-related expenses that forced the company to also trim guidance for next year.
But analysts aren’t fazed.
“We are maintaining DG’s top pick status,” Oppenheimer’s Rupesh Parikh writes in a Dec. 4 note reiterating his “Buy” rating on DG and a bullish $120 price target. “We still feel confident in the company’s ability to deliver industry-leading bottom-line growth next year within our food retailing/discounter universe.”
Parikh’s positive views are based on multiple factors including a runway for further store growth, a history of strong returns, and potential for initiatives to sustain top-line momentum and even drive a pickup in more discretionary categories. He recommends investors take advantage of any weakness by jumping in during dips.
You can learn more about the analyst community’s views on Dollar General via this TipRanks DG Research Report.
Market value: $38.9 billion
Dividend yield: 2.0%
TipRanks consensus price target: $97.50 (7% upside potential)
Waste Management (WM, $91.38) is the largest environmental solutions provider in North America, with more than 21 million customers across the U.S. and Canada. That’s not the cleanest or most attractive industry – but it’s always in demand.
The stock recently earned a rare “double upgrade” from Goldman Sachs. Goldman’s Brian Maguire took the stock all the way from “Sell” to “Buy” on Dec. 4, including a $94 price target. Maguire says waste stocks “should be a core holding in every portfolio.”
“Given the age of the current business cycle and expectations for slowing economic growth, we believe now is the right time to own waste stocks,” Maguire writes. “The waste sector not only compounds earnings growth at a higher rate than the overall market, but it does so with much less volatility and draw-downs in its earnings.”
Bear in mind, shares are enjoying an 8% gain in 2018 despite the treacherous market conditions. See what other experts are saying with TipRanks’ WM Research Report.
Market value: $26.7 billion
Dividend yield: 1.0%
TipRanks consensus price target: $241.40 (27% upside potential)
Canadian Pacific Railway (CP, $190.02) operates a network of roughly 12,500 miles from Montreal to Vancouver and the U.S. Northeast and Midwest regions.
Five-star RBC Capital Markets analyst Walter Spracklin calls CP his preferred name in the railroad sector today and forecasts “solid double-digit EPS growth out to 2020.” That’s thanks to three key factors: 1) robust volume growth opportunity, 2) strong pricing environment and 3) significant operating leverage.
Shareholders also enjoy a modest dividend – a payout that should get larger over time. “With stable capital expenditure requirements and clean balance sheets, we believe that the industry is positioned to generate increasing free cash flow that will in turn drive up shareholder returns through sustained growth in dividends and share repurchases,” Spracklin writes.
He reiterated his “Buy” rating on CP, noting that shares are trading at an attractive discount to peers that makes this investment opportunity “very compelling.” Investors interested in more analyst feedback on Canadian Pacific can find it in this free CP Research Report from TipRanks.
Market value: $50.3 billion
Dividend yield: 1.2%
TipRanks consensus price target: $152.00 (8% upside potential)
Beauty giant Estee Lauder (EL, $140.13) owns multiple well-known brands including Estee Lauder, Clinique, MAC and Bobbi Brown. Yes, when most people think of consumer staples, they think of toilet paper and canned food, but makeup is viewed as an essential by millions of Americans, and their spending habits reflect this.
Estee Lauder’s outlook looks rosy following its most recent Street-beating quarter, in which earnings of $1.41 per share easily beat analyst estimates for $1.22.
“We continue to look very favorably upon EL’s longer-term prospects,” Oppenheimer’s Parikh wrote following the results. He also recently reiterated his “Buy” rating with a $148 price target.
The analyst’s long-term bullish thesis? “We believe the company’s positioning to the global prestige beauty category, a strong management team under the leadership of CEO Fabrizio Freda, and consistent track record on the M&A front position the company to continue gaining market share.”
The Q1 beat also prompted Credit Suisse’s Michael Binetti to push his price target from $155 to a Street-high $165, representing 18% upside potential. Get the EL Research Report from TipRanks.
Market value: $49.7 billion
Dividend yield: N/A
TipRanks consensus price target: $42.71 (15% upside potential)
Health care stocks can certainly have their ups and downs – especially smaller biotechnology companies whose fates rest on one or only a few trial-stage drugs making it all the way to medical approval. But other healthcare stocks, with greater product diversification, are able to more safely take advantage of a generational shift. Roughly 10,000 Baby Boomers enter retirement each day, and as this massive generation continues to age, they require more medical products, services and attention.
One sometimes overlooked area is medical-tech, which includes the likes of Boston Scientific (BSX, $36.98). Boston Scientific is a medical-device maker whose hands are in several cookie jars, including cardiology, radiology, cardiac surgery and endoscopy, among other fields. That wide range ensures that something BSX makes is always in demand.
The stock, which has surged nearly 50% this year, is buzzing again on news that it’s acquiring U.K.-based surgical-device maker BTG plc for approximately $4.2 billion.
“We believe BTG’s interventional medicine (IM) segment complements BSX’s Peripheral Intervention (PI) business as well as other recent acquisitions” Needham’s Michael Matson cheers. Matson sees potential for upside to estimates given BTG’s geographic mix, cross-selling opportunities and cost synergies. As a result, he reiterated his “Strong Buy” rating with a $43 price target (16% upside potential).
“In contrast to BSX’s recent tuck-in deals, BTG is a larger deal and offers near-term accretion,” he says, which is good because accretive mergers and acquisitions are part of Needham’s larger bullish thesis on Boston Scientific. You can learn more about analysts’ views on this stock via TipRanks’ BSX Research Report.
Market value: $47.8 billion
Dividend yield: 2.1%
TipRanks consensus price target: $182.71 (23% upside potential)
When you think of tractors, you think of Deere (DE, $148.31) – an agricultural giant that’s one of BMO Capital analyst Joel Tiss’ “favorite longer-term ideas.”
Deere certainly is more cyclical than most stocks that are traditionally considered to be defensive. Still, it’s dominant in many of its fields, has a strong balance sheet and sports a 0.9 beta – a measurement of volatility in which anything under 1.0 is considered less volatile than the broader market.
Tiss predicts “years of growth and margin expansion ahead” but cautions that it is difficult to predict the exact timing of the farming machinery replacement cycle. Tiss has a bullish $195 price target on DE, indicating that upside can top 30%.
Baird’s Mircea Dobre also has singled out DE of late, calling Deere a “Fresh Pick” – one of an elite group of stocks chosen by Baird’s analysts for their potential to outperform. He predicts that Deere can benefit from continued demand into 2019, on top of better price-cost dynamics, strong seasonal tailwinds and significant potential for either share buybacks or capital deployment.
In the near-term, Dobre highlights improvements in the U.S.-China trade war as a catalyst for the stock. You can get more analysis in TipRanks’ DE Research Report.
Market value: $27.2 billion
Dividend yield: 0%
TipRanks consensus price target: $161.57 (22% upside potential)
Centene (CNC, $132.87) is the largest Medicaid managed-care organization (read: health insurance) in the U.S., with 14.4 million managed-care members.
According to five-star Oppenheimer analyst Michael Wiederhorn, demand for Medicaid managed care is on the rise. States are increasingly outsourcing traditional Medicaid and higher acute populations to managed care. And following a recent buying spree, Centene should benefit from multi-year synergy opportunities and an even greater presence in Medicare Advantage. CNC snapped up Health Net in 2016, and Fidelis Care in 2018, in two multibillion-dollar deals.
“With the exchange business expected to continue its growth, supplemented by long-term opportunities across Medicare, Medicaid and international, Centene is well positioned to carry its strong performance into 2019 and beyond,” Wiederhorn writes.
As a result, he believes Centene will continue to boast strong revenue and earnings growth prospects for years to come. Meanwhile, his $165 price target implies 24% upside potential. Get the CNC Research Report from TipRanks.
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.