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5 Defensive Picks to Stay Safe in Volatile September

Wall Street has entered September with a series of serious near-term concerns. Inflation continues to be at a 40-year high despite an increase in the Fed Fund rate from almost zero to 2.5% during March to July. Moreover, the central bank has started to systematically reduce the size of its $9 trillion balance sheet since June.

Fed Chairman Jerome Powell and various other top Fed officials with voting rights have indicated that the rigorous rate hike will continue until inflation is at least down to near the Fed’s 2% target rate. As a result, market participants are highly concerned about a recession in the U.S. economy in the near future.

Moreover, September is historically known as the worst-performing month on Wall Street. At this juncture, it will be prudent to stay invested in defensive stocks from utilities as these are less volatile in a market’s downtrend. Five such stocks with a favorable Zacks Rank are — NextEra Energy Inc. NEE, Atmos Energy Corp. ATO, Entergy Corp. ETR, The Southern Co. SO and Alliant Energy Corp. LNT.

Why Should You Choose Defensive Stocks?

Markets are likely to remain volatile as investors are waiting for the crucial FOMC meeting in September. Defensive sectors like consumer staples, utilities and health care should provide stability to one’s portfolio.

Defensive sectors are mature and fundamentally strong as demand for their services is generally immune to the changes in the economic cycle. These sectors include companies that provide necessities and products for daily use. Therefore, these sectors have always been a go-to place for investors who want to play it safe during extreme market fluctuations, irrespective of internal or external disturbances.

Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for the visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.

Moreover, the regulated nature of their business, lends utility companies’ revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues that are lately plaguing other industries.

Our Top Picks

We have narrowed our search to five utility stocks with growth potential for the rest of 2022. These stocks have seen solid earnings estimate revisions in the past 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

NextEra Energy is expanding domestic clean energy assets through acquisitions and organic initiatives. NEE has stakes in natural gas pipelines in Texas and gains from an increase in natural gas production.

To enhance flexibility, NextEra Energy completed a few financing agreements to secure funds for acquisition. NEE benefits from declining installation costs and improving renewable technology. It has sufficient liquidity to meet obligations.

NextEra Energy has an expected earnings growth rate of 12.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 30 days.

The Southern Co. is one of the largest electric utility holding companies in the United States, and the premier energy firm serving the attractive Southeast market. Positioned in a niche industry with high barriers to entry, SO’s less volatile and recession-proof business model presents a unique opportunity to earn high returns.

Southern Co. has gradually increased its customer base, ieveraging the demographics of its operating territories. With good rate-based growth and constructive regulation, SO is expected to generate steady earnings and dividend growth in the coming years.

The Southern Co. has an expected earnings growth rate of 6.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11.1% over the past 30 days.

Entergy has an investment plan in place to maintain utility support, and upgrade distribution and transmission. Such investment plans are expected to boost customer and industrial load growth, which should drive the earnings of Entergy.

Over the next three years, ETR plans to invest $12 billion. Entergy is also making steady investments to boost its renewables portfolio. ETR plans to add more than 2,500 megawatts of capacity by the end of 2025 and more than 5,000 MW of renewables by 2030.

Entergy has an expected earnings growth rate of 6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 30 days.

Atmos Energy continues to benefit from rising demand from its expanding customer base.  ATO is planning to invest in the range of $13-$14 billion from fiscal 2022-2026 to increase the reliability of its pipelines and serve customers efficiently.

Returns within a year of capital investment continue to boost Atmos Energy’s performance and allow it to pay regular dividends. ATO has enough liquidity to meet near-term debt obligations.

Atmos Energy has an expected earnings growth rate of 6.9% for the current year (ending September 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the past 30 days.

Alliant Energy has plans to strengthen and expand its infrastructure, retire coal-fired units, add clean assets to its generation and become carbon neutral by 2050. Electricity generated from clean assets will assist LNT to meet demand from customers. Alliant Energy plans to invest $6.1 billion between 2022 and 2025. The returns from regulated assets provide LNT with earnings visibility.

Alliant Energy has an expected earnings growth rate of 6.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 18.2% over the past 30 days.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
 
Southern Company The (SO) : Free Stock Analysis Report
 
Entergy Corporation (ETR) : Free Stock Analysis Report
 
Atmos Energy Corporation (ATO) : Free Stock Analysis Report
 
Alliant Energy Corporation (LNT) : Free Stock Analysis Report
 
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