Markets have been volatile lately, bringing uncertainty to a business that really just wants predictability. In a way, this is worse than a run of bad news; at least when times are bad, investors know what will happen next. The question for investors now, is how to ride out this wave of volatility? That’s a hard question to answer; in August, 11 of 22 trading sessions saw the total market shift 1% or more.
Protection lies in the market’s traditional refuge, the defensive stock. Nicholas Getaz, of Franklin Templeton Investments, says of the perfect stock that it’s a company with “a leading market position, products that are industry norms and standards, innovative growth drivers, and a business model that increases resilience.” So, let’s use the TipRanks Stock Screener to find three companies that meet this definition, and see what makes them compelling buys right now.
Home Depot, Inc. (HD)
We’ll start with an industry leader, the largest of the home improvement superstores. HD reported Q2 earnings on August 20, and the results were interesting. Revenues just missed the forecast, coming in a half-percent low at $30.84 billion. EPS, however, showed a 3.26% positive surprise; the expectation was $3.07 while the actual result was $3.17. Investors were pleased, and HD stock has gained 4% since.
Just as important, HD is well-positioned to keep gaining, given today’s business environment. Interest rates are low, and the Fed is widely expected to make at least one more cut this year. This puts downward pressure on mortgages, creating an environment in which homeowners are more likely to refinance and plow their savings into needed home improvements and repairs. Which, of course, necessitates a trip to Home Depot.
Home Depot, for its part, has been using its solid earnings, at least in part, to reward investors. The company offers a 2.4% dividend, a modest yield but a $5.44 annual payment due to the high share price. The company has been steadily increasing the dividend payment for the last decade.
Wall Street’s top analysts are mostly pleased with HD’s performance in the first half. From Wells Fargo, Zachary Fadem writes, “We believe solid first half cost controls bode well for second half achievability, and … an improving setup ahead, featuring easing year-over-year compares, cycling lumber deflation, potential housing category improvements, etc.” Fadem gives HD a buy rating with a price target of $235, suggesting an upside of 4.8%.
5-star analyst Peter Benedict, of Baird, agrees that HD is a valuable buy, writing, “Home Depot Q2 results did not contain any surprises and its results were likely good enough to support the shares at its current valuation.” His $230 target is slightly more conservative, with a 2.6% upside.
Overall, HD shares have a Moderate Buy consensus rating, based on 10 buys and 6 holds assigned in the last three months. Shares are selling for $224, and are still rising after the positive quarterly report. The average price target of $228 suggests a small 1.8% upside.
Cisco Systems, Inc. (CSCO)
Cisco is the tech company that other tech companies rely on. It makes networking hardware, the gear that physically connects the internet. It’s a solid niche, that has defined its ‘industry norms and standards,’ and keeps the company in a comfortable position.
Despite some recent share price losses, CSCO returned a 1.32% positive EPS surprise in its most recent quarterly earnings. And the company continues to pay out its 2.96% dividend. The quarterly payment is only 35 cents, but it’s reliable, and adds up to $1.40 per share annualized. Better yet, Cisco has been steadily increasing that payment; the dividend has risen 13% over the past 5 years. Shares have more than doubled over that time, as well.
Reviewing CSCO for Cowen, 5-star analyst Paul Silverstein gave the stock a solid buy rating with a $61 price target. He wrote, “Trends in the bulk of its businesses remain healthy, supporting our view of a meaningful increase to its impressive margin structure and improving execution across most product and customer markets.” His price target implies an upside of 28%.
Piper Jaffray’s James Fish agrees that Cisco is a buying proposition and a clear value. He says, “We see good risk-reward on Cisco at current levels as long as the company's growth segments … continue to execute.” His target, $55, indicates a 16% upside.
The analyst consensus on CSCO is a Moderate Buy, based on 15 buys and 7 holds. The stock is trading for $47, and the average price target of $56 suggests an upside potential of 19%.
General Dynamics Corporation (GD)
Sheer size insulates this company from most economic problems. It is the fifth largest defense contractor in the US, and the sixth largest globally, with over $36 billion in annual revenue. Some of the company’s products are highly classified; others, like the F-16 fighter jet and the M1A1 tank, are among the world’s most recognizable weapon systems.
Its leading position in the defense industry means GD is poised outperform the market this year. Where as the S&P 500 is up 17% year-to-date, GD shares have gained 21%. Back in July, when the company reported Q2 earnings, the $2.77 EPS beat the forecast by 3.25%.
For return-minded investors, General Dynamics offers a 2.14% dividend. The share price is high enough to make the annual payment $4.08 per share, or $1.02 paid out quarterly. The company has paid out steadily, and regularly increased the payment, going back to 2011.
GD’s well-founded position in its industry has attracted Buy ratings from some of Wall Street’s best analysts. Cai Rumohr, an aerospace expert with Cowen, gave the stock his approval along with a $202 price target at the end of August. His target suggests a 6% upside.
Recent gains in GD shares have pushed the stock price above the average price target. GD is selling for $190, a 16% premium to the target. The analyst consensus, based on the two most recent reviews, a buy and a hold, is to Hold this stock. Momentum is on GD’s side however, considering the stock’s gains so far this year and its key role in a critical industry.
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