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4 Defensive Stocks to Weather Trade-War Volatility

Bellicose words and hawkish trade policy have turned into a larger skirmish in the simmering trade war. US President Trump on Thursday tweeted that he would impose new tariffs on Chinese imports starting September 1. The tariffs, set at 10% on some $250 billion in Chinese products, will target consumer goods, including electronics. In response, China allowed the yuan to drop past 7 to the dollar – its weakest in over a decade – a reversal of the government’s usual policy of currency support. China’s government shrugged off Trump’s accusations of currency manipulation, and in today’s trading has set the yuan at a slightly stronger rate.

Markets, of course, have reacted, with the Dow Jones losing 5.4% and the S&P 500 losing 5.6% between July 30 and August 5. Both indexes showed modest gains on August 6, and still show strong gains year-to-date.

Here, we’ll look at four stocks well-positioned to weather trade-war induced volatility. All are buy-rated, all have recently beaten their earnings estimates, and top analysts have noted paths forward for each of them. And all four fit one of Warren Buffett’s favorite criteria for choosing stocks: “Only invest in simple businesses that you understand.”

Coca-Cola Company (KO)

We’ll start with the world’s most recognized soft drink, Coca-Cola. Coke is definitely a simple business, in the sense that Buffett meant; even though it markets more than 500 branded products, the company has kept its product line focused steadfastly on bottled beverages. By keeping strictly to a sector it knows and does well, Coke has built a powerful brand and a loyal customer base.

On July 23, the company reported 63 cents EPS, beating the forecast by 1.6%. Reported revenues, $10 billion, were just above the expected $9.99 billion. KO shares broke above $54 after the earnings release, and still remains near that all-time high. Year-to-date, KO is up 10.4%.

Writing after the earnings report, William Chappell of SunTrust Robinson noted the earnings beat and rising revenues, and said, “The company's strong organic sales trends will continue for the balance of the year based on its anticipated investments and momentum in its markets, with more benign FX conditions in 2020 also relieving some of the headwinds of 2019.” He boosted his price target to $60, to go along with his Buy rating. His target indicates confidence in a 14% upside for KO.

RBC Capital’s Nik Modi also sees strength in KO, writing, “The company is executing well against its strategy to becoming a total beverage company—driving both organic revenue and earnings per growth.” Modi sees the company’s near- to mid-term earnings growth remaining in the mid- to high-single digit range. In line with this upbeat outlook, he sets a $60 target on the stock.

Overall, Coke’s stock maintains a Moderate Buy rating, based on an even split of 6 buys and 6 holds over the past three months. The current share price is $52.27; as mentioned above, this is close to the stock’s all-time high. The average price target, $57.18, suggests an upside of 9.39% for KO.

Johnson & Johnson (JNJ)

The consumer health giant offers us an interesting study. It’s a market leader in home health products, and also manufactures a variety of prescription drugs. Both business segments are profitable and tend to outperform the market; yet JNJ is only up 1.33% year-to-date, and the stock has slipped 7% since mid-July. The company’s fortunes are balanced between last month’s strong second-quarter earnings and a series of legal actions that have investors worried.

For Q2, JNJ reported a 4.8% earnings beat, with EPS of $2.58 per share against the forecast $2.46. This was a 42% year-over-year gain. Revenues were also beat expectations, by 1.3%, and came in at $20.56 billion for the quarter. That was the good news.

The bad news – the legal worries – concerns a set of ongoing issues, on the company’s talcum powder and possible liability exposure to the opioid epidemic, that have been dogging JNJ since last year. Investors are concerned based on the size of potential judgements against the company. BMO analyst Joanne Wuensch addressed the legal cases in her review of the stock two months ago. She said, “Litigation is a common occurrence in the health care sector that takes significant time to resolve, and often headlines are worse than reality.” Believing that JNJ has plenty of underlying strength to fall back on, she gives the stock a $157 price target and a 20% upside.

Five-star analyst Jayson Bedford, writing from Raymond James, agrees with Wuensch’s assessment of JNJ stock. He says, “There is still plenty of drama ahead for Johnson & Johnson investors in the near term, but the company has solid fundamentals and the stock has an attractive valuation.” While upbeat, Bedford’s price target is more cautious, at $146, but still implies an upside of 11.6%.

While Johnson & Johnson shows the most near-term weakness of the stocks in this list, it also shows the highest longer-term potential. JNJ shares have a 15% upside, based on a share price of $130 and an average price target of $151. The moderate buy rating is based on 4 buys and 3 holds from the past three months.

Sherwin-Williams Company (SHW)

Best known for its line of paints, Sherwin-Williams is the leading provider of paints and coating for the industrial and construction sectors. The company pleased investors and analysts last month, when its Q2 EPS of $6.57 beat the forecast by 3.5%. The beat was especially welcome after SHW missed earnings in the previous quarter.

Wall Street’s analysts were quick to pick up on SHW’s performance. Writing from RBC Capital, Arun Viswanathan said, “The quarter was driven by strong execution in its North America retail market and a favorable backlog of delayed projects. The company's comps growth of 4.3% topped our forecast of 3% thanks to the higher sales volume and an increase in selling prices.” Viswanathan increased his price target by 6.3%, to $550, indicating a 10% upside for SHW.

Susquehanna analyst Don Carson looked at Sherwin-Williams’ forward potential, and wrote, “We have increased confidence in the outlook for strong earnings growth in 2020 given strong Paint Stores Group sales growth in the face of adverse weather which underscores the potential for further margin expansion from falling raw material costs.” Carson’s $580 price target suggests a 16% upside potential for the stock.

SHW’s analyst consensus rating of Moderate Buy is based on 7 buys and 4 holds assigned in recent months. Shares are pricey, at $498, but the high share price means the modest dividend yield of 0.91% pays out $4.52 per share annualized. The average price target, $531, implies a 6.58% upside for this stock.

Waste Management, Inc. (WM)

Our last stock here is also probably the strongest on this list. Waste Management’s 30% year-to-date gain is more than double the S&P 500’s 15%. In addition, Waste Management has consistently beaten the quarterly earnings expectations, and its last report was no exception. The $1.11 EPS was 3.7% higher than the $1.07 forecast, and the $3.95 billion in quarterly revenue was significantly higher than the year-ago quarter’s $3.74 billion.

Waste Management’s secret to consistent outperformance is in its name: the company is North America’s largest provider of garbage collection and recycling services. Like Johnson & Johnson, Waste Management leads in a business segment that will always have ready customers. It is a classic defensive stock.

The markets top analysts were predictably upbeat after the earnings report. Two analysts – Patrick Brown, from Raymond James, and Derek Spronck, from RBC Capital – both issued increased price targets for WM. Brown raised his to $127, and Spronck set his at $126. At the same time, Scotiabank analyst Mark Neville opened coverage on the stock, with a Buy rating and an aggressive price target of $130. Neville’s target implies an upside potential of 12% for WM shares.

The analyst consensus on WM is a Moderate Buy. The stock has received 4 buys and 2 holds in the past three months. Shares are selling for $116, so the $124 price target gives them an upside of 7.3%.