Volatility rules the day, as the markets have seesawed between gains and losses in recent sessions, and investors understandably nervous. With coronavirus cases rising – in the wake of state reopenings and the wave of race riots that have recently inflamed the nation – there’s a growing possibility that we’ll face further lockdowns in the future.
Yes, Administration officials – notably Treasury Secretary Mnuchin – have made statements that the country cannot afford another full economic shutdown, but those statements came before the rise in COVID-19 cases. If cases continue to rise, so will the political pressure to lock down – and that will bring severe economic consequences. The upcoming November election just throws another unpredictable factor into the mix.
So, it’s time for defensive stocks. These are stocks that will provide your portfolio with a degree of insulation, protection from the negative chances inherent in the markets. Sometimes that protection comes in the form of high dividends, sometimes in the form of countertrend share appreciation, and sometimes it comes from a solid business foundation and cash-flow.
With that in mind, we’ve opened the TipRanks database to find three stocks that fit the defensive profile. Each exemplifies one of those defensive modes; let’s find out what else makes them compelling in today’s environment.
Peloton Interactive (PTON)
We’ll start with Peloton, the exercise equipment manufacturer. The company gained its initial notoriety when it started 7 years ago, using crowdfunding through Kickstarter to raise initial capital. The company’s Christmas ad campaign last year also got people talking, although not quite the way the company had wanted. Still, any press is good press, and Peloton’s name got into the news.
Peloton has benefited from the unpredictable nature of contingency. The company sells home exercise equipment by online and mail order, with products delivered directly to the customer’s address. It’s a model tailor-made to succeed during the corona crisis, when homebound people wanted to stay active but couldn’t get out. To this end, PTON shares skyrocketed over 100% year-to-date.
Two key points from the company’s fiscal Q3 earnings report, released in May, underscore these points. First, quarterly sales during the lockdowns hit $524 million, for a 66% year-over-year gain. And second, the company hosted an online exercise class that drew 23,000 streaming participants – it’s largest audience ever. Along with the share appreciation, these points show the strength of PTON in today’s climate.
Needham's Laura Martin sees a clear path for Peloton’s continued success. The 5-star analyst describes it thus: “[We] think PTON is a great place for investors to hide because we expect: a) strong demand for PTON bikes indefinitely because its wealthy target market will remain hesitant to return to public gyms for years; b) many large residential buildings in cities have closed their in-building gyms…; c) PTON user data shows workouts/month grow over time, so PTON's biggest value-creation problem was adoption/buying the bike, which COVID-19 is solving…”
Martin raised her price target on PTON by 30%, to $65. Her new target suggests an upside potential of 11%, and supports her Buy rating on the stock. (To watch Martin’s track record, click here)
Overall, Peloton gets a Strong Buy rating form the analyst consensus, based on 22 recent ratings. These break down to 20 Buys, and one each Hold and Sell. (See Peloton stock analysis on TipRanks)
MRC Global (MRC)
Next on our list is a parts supplier to the energy industry. It’s common to think of hydrocarbons as the end point of energy investing – but the industry has spawned a whole network of support companies, without which not one erg of power could be produced. MRC is the world’s largest provider of piping, valves, and fittings, along with other infrastructure products, to the energy industry and its midstream partners. MRC is small-cap company, with only $506 million market capitalization, but it occupies an absolutely essential niche.
That essential niche helped the company to a 4% sequential revenue gain in Q1 2020, with the top line hitting $794 million. That number was down 18% yoy, due to decreased demand across the board during the coronavirus lockdowns. Earning showed similar mixed results, coming in at 4 cents per share. This was far down from Q1 2019’s 14-cent EPS, but it beat the 5-cent net-loss forecast by a wide margin.
Douglas Becker, 4-star analyst with Northland Securities, sees MRC shares as a solid buy right now, noting: “MRC is a defensive way to play energy and the general re-opening thesis. The distribution model offers counter-cyclical cash flow generation and low capital intensity, while MRC's end markets are diversified within energy and industrial value chain. We see reward outweighing downside risk by about 1.5:1."
In line with his upbeat outlook, Becker gives MRC a Buy rating and his $7.50 price target indicates a 28% upside potential for the coming year. (To watch Becker’s track record, click here)
Overall, MRC’s Moderate Buy consensus rating is based on 2 recent reviews – and both agree that this is a Buying proposition. Shares are currently priced at $5.91, and the $7 average target implies an upside of 18% in the coming months. (See MRC stock analysis on TipRanks)
Virtu Financial (VIRT)
Last on our list today is Virtu Financial, a $4.5 billion financial services company. Virtu offers a huge array of services, including liquidity sourcing, trading products, analytics, and multi-dealer platforms. Virtu’s customers can use the service to trade in equities, commodities, currencies, and more.
VIRT’s Q1 earnings hit $2.05 per share, beating estimates by a fantastic 35%. The high-speed, online trading platform attracted home-bound customers during the pandemic lockdowns, another example of a company being fortuitously positioned for changing circumstances. Revenues rose 242% year-over-year, from $228.8 million to $784.5 million.
Solid earnings underlay the company’s dividend. The most recent payment, made on June 15, was 24 cents – where it has been stable since 2017. At current share prices, the yield is 4.2%, which is more than double the average yield found among S&P-listed companies, and the payout ratio is 11%, showing that the company can easily afford the payments. This is a clear incentive for defensive-minded investors.
Piper Sandler analyst Richard Repetto likes Virtu as a pure defensive play, writing, “VIRT has seen strong fundamentals with strong equity volumes, and though investors likely do question the sustainability of volumes over time, on market pullbacks & increased volatility like we've seen over the past week, VIRT normally performs to the upside.” The analyst added, "While we'll wait to see full 2Q20 metrics before adjusting estimates, we believe VIRT's normalized earnings could be reset higher given the continued elelvated retail trading environment."
Repetto rates the stock a Buy alongside a $29 price target, which suggests a one-year upside to VIRT of 24%. (To watch Repetto’s track record, click here)
With 2 Buys and 4 Holds set in recent weeks, VIRT shares have a Moderate Buy form Wall Street’s analyst consensus. Shares are selling for $23.40, and the average price target, at $27, implies room for 15% upside growth this year. (See Virtu’s stock-price forecast on TipRanks)
To find good ideas for defensive stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.