After the roller-coaster ride of the past couple of days, most equity investors are probably ready to get off the volatility train, and with good reason. The forced buying of volatility contracts to counter the short volatility exchange traded funds that were being destroyed probably skewed some of the indexes, which in turn could have very easily scared investors into selling, all while algorithm programs that chase selling did just that.
The bottom line is it is unlikely this economy will go into recession this year, which could truly be the harbinger of a bear market. However, a new Baird report, while not making a broad market call, did highlight some companies that should outperform in a market downturn or benefit in a rotation to value stocks and have been out of favor for years.
We were intrigued by four companies that do look like solid plays for nervous investors now.
Archer Daniels Midland
This is a very solid play for rocky markets and is offering a very reasonable entry point. Archer Daniels Midland Co. (NYSE: ADM) is a large agricultural services company with almost $90 billion in sales. It is in the business of converting agricultural harvest such as corn, wheat, soybeans and other products into basic ingredients for both consumer and industrial product manufacturers. Its main business lines are focused on oilseed processing, corn processing and agricultural services.
The company reported solid fourth-quarter numbers that topped analysts’ earnings expectations. But investors may end up reading between the lines of CEO Juan Luciano’s quarterly presentation for any hints as a potential mega-merger deal with rival Bunge, after media reports last month reported the company’s approach to Bunge.
The Baird report noted this:
The company could benefit from a rotation into value stocks, and we continue to recommend shares for long-term investors. While macro headwinds may persist, we think 2018 results could benefit from ADM’s historical cost and efficiency initiatives and increased contributions from facility startups.
Shareholders receive a 3.19% dividend. The Baird price target for the shares is $47, and the Wall Street consensus target is $40.80. Shares closed Tuesday at $42.
This company has seen solid insider buying over the past year. Covanta Holding Corp. (NYSE: CVA) is a world leader in providing sustainable waste and energy solutions. Annually, Covanta’s modern energy-from-waste facilities safely convert approximately 20 million tons of waste from municipalities and businesses into clean, renewable electricity to power 1 million homes and recycle approximately 500,000 tons of metal.
Through a vast network of treatment and recycling facilities, Covanta also provides comprehensive industrial material management services to companies seeking solutions to some of today’s most complex environmental challenges.
Covanta shareholders receive a 6.47% dividend. Baird has a $19 price target, and the consensus target is $18.21. Shares closed Tuesday at $15.45.
This mid-cap company also looks like a solid stock to own during difficult times. W.R. Grace & Co. (NYSE: GRA) is engaged in the production and sale of specialty chemicals and specialty materials. The company operates in two segments. The Grace Catalysts Technologies segment includes catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications.
The Grace Materials Technologies segment includes specialty materials, including silica-based and silica-alumina-based materials, used in coatings, consumer, industrial and pharmaceutical applications.
Baird notes that the company trades basically in line with peers, and its somewhat higher multiple is more than justified by the strong management team and the firm’s leadership position in catalysts.
Shareholders are paid a 1.18% dividend. The $88 Baird price target compares with a consensus target of $84.92. The stock closed Tuesday at $71.36.
Hannon Armstrong Sustainable Infrastructure
This is another solid value at current levels. Hannon Armstrong Sustainable Infrastructure Capital Inc. (NYSE: HASI) is a specialty finance company that directly originates debt and equity investments for sustainable infrastructure projects. The company’s projects focus on products that increase energy efficiency, offer cleaner energy sources and efficiently use natural resources.
The company is a major financier for energy-efficient projects for the U.S. government and operates as a real estate investment trust (REIT). Baird likes the company’s position and noted this in the report:
Hannon Armstrong consistently raises capital to finance the growth of its renewable project portfolio, although the company recently fixed out a large portion of its debt, which positions it for a rising interest rate environment. Additionally, we believe the company’s large pipeline of projects (>$2.5B) will provide sufficient investment opportunities for the company to grow in 2018.
Hannon investors receive a 6.56% distribution. Baird has set its price target at $30. The consensus target is $27.50, and shares closed Tuesday at $20.46.
These four top companies all pay dividends, and the Baird analysts feel can do well in a bear market scenario or one where the market rotates from growth to value. Either way, they are good ideas to consider in this volatile window.