Defensive stocks were investors’ best friends during any sell-offs and periods of uncertainty before the coronavirus turned into the COVID-19 pandemic. Suddenly, even the most defensive stocks found that they were less defensive than previously thought, after their supply chains were disrupted and millions upon millions of Americans and international buyers went from being financially sound to depending on the government.
Most defensive stocks traditionally have paid strong dividends and were tied into sectors such as consumer products and staples, food and beverages, tobacco, big pharma, alcohol, utilities and so on. Now the dividend comparison is not even as strong as it used to be. In a COVID-19 world, all the attention has gone toward the “new immune” tech leaders that dominate the cloud or that have replaced many of the traditional brick-and-mortar goods and services companies that have been compromised in the recession.
24/7 Wall St. has identified five defensive stocks that still have a long way to go before returning to their former highs. All have had some reasons for selling off, but all have at least some positive issues that are not fully reflected in the shares or that seem to be given a discount versus peers.
One issue that is of course difficult to offer is future earnings valuations, due to the extreme scenario the economy is in. In this instance, any reference to normalized earnings would be a blend of 2019 earnings (pre-coronavirus) and future consensus expectations for when things are normal again. We have used Refinitiv for consensus analyst price target data and offered other color as well.
Another aspect of the coronavirus and a return to normality is that what used to be normal might not feel all that normal for quite some time. What has to be considered is that companies will still endure, they will still find ways to remain relevant as they have in the past, and they will try to generate strong profits and reward shareholders again. Just don’t expect that to be the case in 2020, with earnings power looking greatly diminished.
Here are five defensive stocks that must see much improvement before they are deemed expensive or fully valued again.
Coming into 2020, Coca-Cola Co. (NYSE: KO) was looking great, with a technical set-up that seemed like it would have an explosive move higher. Then came the coronavirus, and it ran into troubles in the operations in China, with so many shutdowns.
With shares still close to $45, and with multiple investments in outside companies for beverages, Coca-Cola probably should start to be considered a defensive stock again.
With a 52-week high of $60.13 and a $52.32 consensus target price, Coca-Cola just hasn’t found any love from Wall Street, despite its move away from sugar water over the past decade. The beverage giant also comes with a 3.6% dividend yield and is valued at about 22 times normalized earnings.
As a dollar store, Dollar Tree Inc. (NASDAQ: DLTR) is in a defensive retail space. Even with Family Dollar stores, it is still worth less than half of rival Dollar General, despite having about 85% of the revenues in comparison. Investors have been concerned about it having more leverage and a less solid earnings report path, but the most recent report was strong enough that investors should start looking at its long-term optionality, rather than its rival having grown so much.