The current economic conditions are very tricky for investors and traders alike, we’re all wondering what stocks are the best to hold right now? Mainly what are the best defensive stocks right now to protect us from potential downside risks and have the opportunity to rally well should the markets turn around drastically.
What are defensive stocks?
They are typically identified as stocks that have a low beta, meaning they are not really swayed by overall stock market movements. They provide consistent dividends and they have stable earnings. They are typically well-established, long-standing companies that are non-cyclical. Meaning they don’t fluctuate earnings based on the economy. Or they don’t do too much at least.
To the prior point, if the S&P 500 has a beta of 1.0 and it represents the general economy. Then a low beta stock would be anything under 0.5 or even -0.5. There are a lot of consumer staple stocks that are considered defensive. There are also sectors that we can consider defensive sectors.
Defensive stock sectors
The main sectors that are considered defensive are consumer defensive, healthcare, and utilities. The consumer defensive sector is a stock sector full of companies that are needed no matter what, they consumer essentials.
No matter what happens to a person, they will need these products to survive, no matter the economic condition, these products are still being purchased. They include companies that manufacture food, beverages, household and personal care products, packaging, and education/training. To a lesser essential extent also includes tobacco companies.
The healthcare sector is what you would imagine it to be. Consisting of a list of companies that provide anything to do with healthcare and medical services, medical equipment manufacturers, drugs, medical insurance, etc. Those are the main subsets of companies in the healthcare industry. This is an industry that will be around and used until humans develop a way to live forever without illness. During pandemics, like the current COVID-19 pandemic, healthcare industries will see a rise throughout the increased demand and use of products.
The last sector in defensive is the utilities sector. Again is a sector of companies that are going to be used regardless of economic conditions, a list of basic amenities companies. People use utilities as a necessity. From companies to individual use. Utilities are always in demand. The utilities are water, sewage services, electricity, dams, and natural gas. They are a public service and heavily regulated but still earn profits.
Finding companies within these sectors are a good start to finding defensive stocks to add to your portfolio. There are also some caveats with that. There are companies out there that by definition are not defensive stocks, but they are extremely resilient to economic downturn conditions and enjoy frivolous upside on the basis of being a cash-heavy company that people demand regardless.
The top 5 Defensive stocks right now
Below is a list of the top 5-defensive companies that have a bright future and have held their ground throughout the COVID-19 pandemic and managed to come out of it well.
Proctor and Gamble
P&G has been a large player in the manufacturing industry of a lot of consumer staples for decades. P&G owns a lot of smaller companies that you have heard of for sure, like Tide, Gillette, and other household names in the US and the world. As of 2019, the company was responsible for 20% of the worlds hair-care market, 25% of laundry detergent, and 25% of global sales of baby products. It has good profit, revenue and consistency with products that will be used for decades to come.
There is stability in the stock, where it did drop pretty hard from the dump into March off COVID-19 stress, it dropped 25% compared to a 35%-40% dump in the overall market. Rallying back to its original levels it has resumed a healthy rally that will range for a while. Holding consistent dividends of 2.55% P&G is one for the list.
Walmart is a huge company that everyone knows, it’s revenue eclipses that of P&G but they’re both large companies. Walmart is the worlds biggest retailer, with more than $500 Billion in revenue annually. Employing 2.2 million people worldwide, the consumer shop has everything you need, from groceries to cleaning, pet supplies, beauty and baby products. The low-cost approach has enabled Walmart to break through and hold its position as a great defensive stock. The dividend paid has risen for over 40 consecutive years. Although the capital gains on the stock are not insane, the stability and good dividend attracts people in dire times.
Dropping around 15% during the 2020 market crash, the stock is now up into all-time highs and holding its ground really well.
A huge name in the global beauty supply market, Estee Lauder has built an empire, with more than 25 brands over skin-care, fragrance, makeup which are all staples in an individual’s life. 40% of sales come from skin care, 40% from prestige makeup and just under 15% from perfume. They have retailers that distribute products, they are rarely found in discount stores or discounted at all which upholds the image of prestige and keeps margins high. Estee Lauder has a lot of innovation that helps them stay ahead and continue to grow with new products. The company doesn’t pay the largest dividend but it has a 1.01% dividend paid out.
An energy company that is an integrated power company that produces, sells, and distributes energy and energy services. The company is multifaceted in the world of energy, providing energy production and cogeneration facilities, thermal energy production, and energy resource facilities. The company has been affected by COVID-19 with a drop in revenue in the first quarter but has a lot of promise as the economy continues to recover. Dropping 7% in revenue in Q1 after reporting earnings. A dividend of 2.12% keeps it in line with what we expected from a defensive stock. A lot of energy companies slipped during COVID due to decreased demand but NRG has done really well to recover. A utilities sector ETF that has a large basket of stocks in it if you’re having trouble picking one out of the whole sector is XLU.
CVS Health Corp
A massive healthcare company that is the parent company of a leading drugstore chain. It’s a massive pharma company as well. It is global operating mainly in the US. With a large market cap of about $70 billion, they have massive revenues from different streams. Healthcare, especially pharma, is in high demand no matter what for individuals. This is a well established company as well. As per dividends, this defensive stock has a dividend yield of 2.82% last paid in 2020. The company took a hit throughout the COVID market dump but is doing well to recover.
This tech and e-commerce giant is not your typical defensive stock. It is not really a necessity, however it is a global provider of virtually anything in a matter of days. During the drop in February and March, Amazon barely moved. Everyone was buying anything they needed off Amazon, the resilience of the company is insane. Granted the type of market crash made it easy for Amazon. No bad news can take this giant down, we’re now above the $3,000 level and continuing to push higher. This company is what we consider a fake defensive, where it’s resilience from being a monster company with a lot of cash and power makes it hard for the company to get hit by bad news.
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