Company / Analytics

Analytics, 23 June 2022

Stocks to consider in the current bear market

As the year progresses, the likelihood of a recession is becoming more apparent. High inflation, raised interest rates as a result, geopolitical tensions, supply chain issues, and the ongoing war in Ukraine are all continuously slowing global economic growth.

Global stocks have taken massive hits in the year. Since hitting their respective all-time closing highs, the 126-year-old Dow Jones Industrial Average, benchmark S&P 500, and growth-focused Nasdaq Composite have respectively fallen by as much as 19%, 24%, and 34%. This means the Nasdaq and S&P 500 are officially in the grip of a bear market.

However, Contrary to popular belief, you don’t have to bail out of all stocks in a bear market or recession. Where there are rising consumer prices, stock prices often follow. The demand for essentials like food, beverages, and medical products makes consumer staples and healthcare stocks safer investments during high volatility.

What stocks should you look at in the current economic slowdown?

Staples

Staples are a defensive sector with a strong likelihood and probability of success of pushing increasing costs to consumers without a significant drop-off in sales and revenues. This is because they are necessities – bare essentials – including food and beverages, personal hygiene, and cleaning products. Consumer staples should experience the least impact on margins and profitability.

Consumer Staples to look at include:

1. Adecoagro S.A. (NYSE: AGRO)

South American agro-industrial company Adecoagro S.A. (AGRO) plants, harvests, and packages farming crops, foods, and other agricultural products. On a longer-term uptrend, this consumer staple is currently ranked #1 in its sector and industry and possesses A+ momentum.

Year-to-date, the stock has been as high as +43%, and with agriculture and food in high demand and the natural resources industry growing, this stock continues to trade near its one-year high.

2. Cal-Maine Foods, Inc. (NASDAQ: CALM)

Together with its subsidiaries, Cal-Maine Foods (CALM) produces, grades, and supplies shell eggs for popular brands like Egg-Land’s Best and Land O’Lakes eggs throughout the U.S. Despite its C+ valuation and less than stellar underlying valuation metrics, this stock’s other collective characteristics including growth, momentum, and revisions are solid.

On a bullish trend over the last year, +26% YTD and +32% over one year, as evidenced by the above momentum grade, CALM substantially outperforms the sector on a quarterly basis.

3. Pilgrim’s Pride Corporation (NASDAQ: PPC)

Meat packaging and food company Pilgrim’s Pride Corporation (PPC) markets and distributes fresh and frozen chicken, pork, and other meat products internationally. With stellar overall factor grades, this stock is primed for growth and comes at a great value. With a 22% price increase in 2021, the company anticipates future price increases as a result of inflation, driving sales growth.

Healthcare

The healthcare sector is demonstrating relative strength during this bear market. This is not surprising as health care companies are pretty insulated from changes in economic growth or monetary policy.

Healthcare stocks are one way for investors to hedge against recession risks. But there’s reason to believe that the various areas within the healthcare industry will perform quite differently in the context of an economic drawdown.

Many healthcare companies with strong balance sheets outperform in this environment due to an increase in share buybacks. This is a tax-efficient strategy to increase earnings per share (EPS) and return capital to shareholders. Therefore, investors should consider adding dividend-paying stocks in the healthcare sector to their portfolios. These include;

1. Johnson & Johnson (JNJ)

JNJ is engaged in the research, development, production, and sale of a variety of healthcare products and services. Its three major segments are Consumer, Pharmaceutical, and Medical Devices.

In terms of dividends, JNJ has one of the best track records of consistently raising its payout. Currently, it pays a 2.7% yield and has raised its dividend by an average of 6% annually. The company continues to post strong results, implying that there should be no disturbance in its dividend history.

Next year, analysts expect JNJ’s revenue and EPS to increase 3.8% and 6% year-over-year to $100.14 billion and $10.89, respectively.

2. AbbVie Inc. (ABBV)

ABBV develops and sells pharmaceutical products worldwide. Its products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology, dermatology, oncology, virology, metabolic diseases, pain, and other serious health conditions.

Like JNJ, ABBV has a history of consistently raising its dividend. Over the past five years, it’s increased at an 18% annual rate. Currently, its dividend yield is 4.4% which is considerably higher than the market average and the 1.27% yield on the 10-year.

Thus, it is expected that the stock to continue generating inflows especially as the market is currently in a risk-averse mood.

3. Unitedhealth Group (UNH)

UNH has two major segments: UnitedHealthcare and Optum. UnitedHealthcare provides health care coverage and benefits services. Optum provides information and technology-enabled health services to provide employers with products and resources to plan and administer employee benefit programs.

UNH has been an outperformer over the past year and past decade for a couple of reasons. As the largest health insurance company in the US, it benefits from a strong labor market as this leads to more customers. Additionally, healthcare costs have continually trended higher at a pace faster than inflation. This has also boosted the company’s revenue, cash flow, and margins.

Closing note

History shows that in past recessions, consumer and healthcare stocks have tended to outperform while the rest of the market struggles. In the last four recessions since 1990, they were the only two positive sectors in the S&P 500, according to CFRA Research. This further cements the safety factor of these stocks.

Experts also like energy stocks, which have been the best-performing market sector this year thanks to a spike in oil prices since Russia invaded Ukraine in late February. With oil and gas prices rising even further in recent weeks, companies like Chevron and Occidental Petroleum could see shares continue to surge higher. Of course, it’s important to remember that past performance does not necessarily predict future results. There’s always some risk involved when investing in stocks.

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