in a Previous article, we discuss the growing risk of an impending recession, a risk that is heightened by stretched asset valuations, the Ukraine crisis, and the ongoing Covid-19 pandemic. We highlight the flattening of the yield curve, runaway inflation and a slowdown in the real estate market as some of the bearish indicators that investors should watch.
Here we list several defensive stocks that are likely to weather a downturn with minimal capital erosion. These recession-resistant stocks tend to provide stable earnings and dividends, regardless of the state of the overall stock market, and also tend to outperform in bear markets.
However, defensive stocks come with a caveat: They tend to lag cyclical stocks during strong bull markets. Therefore, it is prudent to balance your portfolio with a healthy mix of both baskets.
giant discount retailer walmart inc. (NYSE:WMT) has often thrived during economic downturns. The CFRA Research analyst says investors don’t fully appreciate the breadth and depth of Walmart’s investments in omnichannel sales initiatives, alternative sources of profit, supply chain improvements and product mix expansion.
For example, Walmart is expected to spend between $16 billion and $17 billion in capital expenditures in 2022, with e-commerce, technology, and investments in automation are likely to pay off for long-term investors. With inflation levels at 40-year highs, shoppers are likely to become more price-conscious this year and increasingly turn to discount retailers like Walmart.
Costco Wholesale Corporation. (NASDAQ:COST) is a leading warehouse retailer whose business model makes it one of the best retail stocks own long term. Costco has about 112 million members, of which 62 million are executive members.
Last year, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), Vice Chairman Charlie Munger told investors that Costco had a specific advantage over amazon inc. (NASDAQ:AMZN) when it comes to growing your business.
“Costco, I think, has one thing that Amazon doesn’t. People really trust Costco to deliver tremendous value. That’s why Costco poses some danger to Amazon, because they have a better reputation for providing value than just about anyone, including Amazon.,” Munger said.
Costco is relentless when it comes to pushing for the best possible prices from their suppliers, not to make more money but to get the best possible prices for their customers. This results in a high trust score with your members and allows you to earn most of your earnings from the annual membership fees of your satisfied members.
#3. Lockheed Martin
Lockheed Martin (NYSE:LMT) is a leading defense contractor that produces high-tech weapons and defense systems. LMT also offers a wide variety of services for governments around the world.
Government budgets and defense spending tend to be much less volatile than other parts of the economy. And the general trend is upward: according to the Deloitte Research Center for Energy & Industrials, defense spending, globally, is expected to grow at an average annual rate of about 3% through 2023 to reach $2.1 trillion.
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LMT has a healthy balance sheet and a long history of paying and increasing dividends. As an example, Lockheed Martin increased its quarterly dividend by 7.7% at the end of 2021 to $2.80 per share, with a current yield of 2.9% much higher than the S&P 500yield of 1.4%.
In addition, the company has been moving into higher growth and higher margin segments such as cyber security and IT service.yes LMT’s defensive qualities are clearly evident in the current market downturn: LMT shares have returned 23.4% YTD vs. -3.4% for the S&P 500.
#4. Northrop Grumman
Another giant defense contractor, Northrop Grumman Corporation.(NYSE:NOC) is another top defensive stock. Over the past five years, NOC has grown revenue at a CAGR of 8.5%, earnings at 20.3%, free cash flow at 8.8%, and dividends at 11.8%. This is because defense spending continues to grow at the aggregate level and NOC is one of the leading stocks in the sector.
In addition to its relative stability as a defense stock, NOC offers additional growth leads thanks to its exposure to the space industry. Northrop’s clients include NASA and telecommunications companies, as it provides services related to space logistics, satellite launches and maintenance, space security and propulsion systems. Overall, space industry revenue is expected to reach $1 trillion by 2040 from the current $350 billion, according to Morgan Stanley.
#5. The Utilities Select Sector ETF
the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) is an exchange-traded fund that invests in the shares of companies operating in all utility sectors.
For decades, utility stocks have been considered an indispensable part of an income investor’s portfolio, thanks in large part to their defensive qualities. First, utilities tend to be more resilient to business cycles than most other sectors of the economy because demand for utilities tends to be stable. Utility stocks such as electricity, gas and water companies can help stabilize a portfolio by reducing volatility and risk, thanks to the fact that the sector is heavily regulated. In fact, most utilities have predictable cash flows, allowing many to pay decent dividends with higher yields than other fixed income investments.
XLU boasts $14.8 billion in assets under management (AUM) and a dividend yield of 2.72%. His top five holdings are:
- NextEra Energy Inc. (New York Stock Exchange: NEE)
- duke of power (New York Stock Exchange: DUK)
- south county (New York Stock Exchange:SO)
domain energy (NYSE:D)
sempra energy (New York Stock Exchange: SRA)
By Alex Kimani for Safehaven.com
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