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3 Top Defensive Plays for the Bear Market

We’re in a bear market now, with the major indexes down nearly 30% from their most recent peak. The S&P 500 has fallen from 3,386 – it’s high point on February 19 – down to 2,437 as of this writing. The fall hasn’t been smooth; stocks have bounced down a steep slope marked by sharp spike and deep troughs.

So, the markets are stormy, and the bears are here, but a savvy stock trader should always remember what a bear does when the weather changes: it hunkers down, and hibernates for the long haul. It’s a defensive strategy, and investors should take the hint. Now is the time to pad the portfolio with defensive stocks, to soften the blow.

What we’re looking for are stocks involved in essential goods and services – things that people need no matter how the markets perform. The stocks we’ll look at in this list fit that profile, one produces basic kitchen supplies, one offers digital cellular and mobile data services, and the third – particularly important in today’s conditions – produces pharmaceuticals and surgical supplies. As might be expected from stocks so uniquely suited to the current environment, all are Buy-rated and show an upside potential in excess of 15%. And one more bonus: each pays out a reliable dividend, providing an income stream for return-minded investors. We’ve run them through the TipRanks database, and pulled up the details. Let's dive in.

Reynolds Consumer Products (REYN)

Most of you will be familiar with Reynolds Consumer Products, simply because the company’s products are so ubiquitous. Aluminum foil and pans, plastic cling wrap and storage containers, oven cooking bags, even Hefty brand trash bags – all are products that most modern kitchens simply cannot do without. A necessary niche is a fine foundation for a defensive stock, and REYN has a solid one.

Despite the good foundation, REYN pulled in lower Q4 revenue year-over-year, $835 million compared to $907 million the year before. Net income, however, was up by 7% to $90 million. In forward guidance, the company projects fiscal 2020 net income of $320 to $350 million.

The company pays out a 15-cent quarterly dividend, which annualizes to 60 cents per share. The yield, at 2.3%, beats the average dividend yield among S&P-listed companies, and is nearly double the current yield of US Treasury bonds, making this stock a sound choice for income investors.

Reviewing the stock for Credit Suisse, analyst Kaumil Gajrawala marks Reynolds as his "top defensive pick in an uncertain world." The analyst rates the stock a Buy, and sets a $34 price target that implies an upside of 24% from current levels. (To watch Gajrawala’s track record, click here)

Supporting his view, Gajrawala writes, “Reynolds noted possible near-term benefits from inventory/pantry-loading and lower commodity costs, neither of which is reflected in guidance. Retailers are increasing orders given higher-than-normal consumer demand, shifting some volume near-term (and leading to increased usage). Also, recent declines in material prices, if sustainable, would have a positive impact on earnings going forward.”

Overall, REYN shares get a Strong Buy rating from the analyst consensus, based on 9 reviews. The reviews include 7 Buys and 2 Holds. Shares are affordably priced, at $27.58, and the average target of $34.78 suggests room for a 26% upside potential in the next 12 months. (See Reynolds stock analysis on TipRanks)

Verizon Communications (VZ)

Next up is Verizon, a $225 billion market cap telecom giant, and the second largest wireless service provider in the US. Verizon boasts over 118 million wireless customers, and saw $132 billion in revenue for fiscal year 2019. This company is truly an 800-pound gorilla in the telecom industry.

It’s also a very clear defensive play for investors. The coronavirus response is likely to increase the need for Verizon’s services, as authorities impose stricter ‘social distancing’ and quarantine restrictions on populations. Digital wireless services will be a convenient way for peers to remain in contact without violating those strictures.

Still, VZ could have entered the current downturn in a stronger position than it did. The company’s Q4 earnings just missed the forecasts, despite a minor year-over-year gain. The $1.13 reported was just above the $1.12 year-ago number, and just below the $1.15 expectation. Revenues did better, and at $34.78 billion beat both the forecast and 2018’s Q4.

Of the stocks on this list, Verizon offers the highest dividend yield, at 4.5%. The quarterly payment of 61.5 cents annualizes to $2.46, and the company has a 12-year history of maintaining reliable payouts. VZ has increased the dividend three times in the past three years, and the current payout ratio, of 54%, shows that the company has plenty of room for further increases.

Colby Synesael, 5-star analyst with Cowen, upgraded his stance on VZ from Neutral to Buy, while maintaining his $61 price target. That target implies an upside potential of 16%. (To watch Synesael’s track record, click here)

In support of his upgrade decision, Synesael wrote earlier this month, “[W]e look to take advantage of the recent sell-off with the stock now trading at a dividend spread not seen in 7+ years. We see low EPS risk considering its U.S.-centric utilitylike wireless business and a well-covered dividend currently yielding 4.5% with outer year catalysts tied to “true” 5G and building FCF.”

Verizon’s Moderate Buy analyst consensus rating is founded on 12 reviews, including 5 Buy-side and 7 Holds. The stock is priced at $52.80, affordable for a true blue-chip giant, and its average price target of $63.22 indicates a 19% upside potential in the coming year. (See Verizon stock analysis on TipRanks)

McKesson Corporation (MCK)

With the last stock on our list, we turn to the pharma sector. Texas-based McKesson is a big name in medical technology, as big as its home state. The company provides software solutions for half of all US-based health systems, 25% of home care agencies, and 20% of all doctor practices. The company’s other main divisions are involved in medical supplies and equipment, and the 3,500-location Health Mart pharmacy chain. McKesson has its fingers – or really, its whole hand – in pretty much every part of the medical industry pie.

McKesson’s huge presence in its field underlies its profitable position. The company’s fiscal 2020 Q3 earnings came in ahead of the estimates, with EPS beating the forecast by 7.6% at $3.54. Even more impressive, the EPS was up 12% year-over-year.

The company managed that impressive earnings performance despite quarterly revenues coming in a half-percent under expectations. The $59.17 billion reported was up more than 5% yoy.

On the dividend side, MCK is highly reliable. The company has been paying out quarterly dividends for 20 years, and has raised the payment three times in the last three years. The current dividend, 41 cents per quarter, or $1.64 annually, sounds small, and the yield is only 1.2%, but payout ratio is only 10%. For income investors, this dividend is as safe as they get – the company earnings are sound, the payment is easily affordable, and there is all sorts of room to raise the ceiling should management choose. Defensive-minded investors could not ask for a clearer bear-market play.

This stock also received an upgrade recently, from 4-star analyst Glen Santangelo of Guggenheim. Santangelo’s $147 price target implies a modest upside of 8%, in cautious support of his newly raised Buy rating. (To watch Santangelo’s track record, click here)

In his comments on the stock, Santangelo said, “We believe the recent underperformance of MCK shares vs. the market and supply chain peers has provided an attractive entry point for this defensive health care utility. As we have written for much of the past year, we believe the US distributors are operating against an improved fundamental backdrop - giving us confidence in the company's core execution. MCK has a strong FCF profile, boasting a ~14% FCF yield…” That FCF yield guarantees the company’s dividend.

Like Verizon, this blue-chip stock has a Moderate Buy rating from the analyst consensus. The stock’s recent underperformance – noted by Santangelo – is reflected in the mix of 5 Buys, 4 Holds, and 1 Sell set in recent weeks. Shares are not cheap, priced at $129.11, but the average price target of $166.89 suggests room for 31% growth to the upside in the coming year. (See McKesson stock analysis on TipRanks)