The past month has certainly been wild for equities. While market pundits expected a pullback in equities due to the overstretched valuation of the U.S. stock market, a few actually thought the reason would be risks emanating from a virus.
Investors are tensed about the economic impact of the fast spread of coronavirus across the globe. In the United States, the death toll has risen to 28, with 1,023 confirmed cases. Globally, the death toll has topped 4,200 and the number of infected cases is now approaching 120,000.
Several well-known companies have already raised concerns about their upcoming earnings and revenue results. They are worried the outbreak will dent demand for goods and services. And since the impact is mostly in China, the virus will lead to both a demand and a supply shock for the global economy. After all, China is one of the world’s largest exporters and importers of goods.
The Fed, by the way, has cuts rates to thwart the coronavirus threat to the economy. In a rare inter-meeting move, the Fed announced an emergency rate cut on Mar 3. The central bank trimmed its Fed funds target rate by half a percentage point to a range of 1-1.25%. In fact, the last time the Fed cut rates on an emergency basis was in the December 2008 financial crisis.
But Fed’s rate cut did little to improve sentiments! After all, Fed’s emergency rate cut suggested that the impact of the coronavirus outbreak on the economy is much worse than what was initially estimated by market pundits. Moreover, a rate cut lowers borrowing costs. But in case of the coronavirus outbreak, the bigger problem lies with demand contraction due to travel restrictions as well as supply disruptions. Now, such issues can’t be tackled just by rate cuts.
President Trump, in the meantime, floated the idea of “a payroll tax cut or relief” to overshadow the negative impact of the coronavirus on businesses and individuals. But his proposed stimulus package has now received mixed reactions from some Republican senators. After all, not all his proposed plans are likely to get passed in the Democratic-controlled House of Representatives.
And let’s admit, we cannot completely write off the adverse impact of the outbreak and the U.S. stock market will continue to gyrate in the days to come. After all, the disease can only be controlled if there is a proper vaccine, which will undoubtedly take time. This is because a drug generally advances through stages, including safety testing and then wider tests of efficacy.
Roller-Coaster Ride for Investors
Just to put things into perspective, benchmarks have been under serious pressure in recent times, with major indexes entering the correction territory on Feb 27, as the virus-led selloff raised concerns of a near-term recession.
On Feb 27, the Dow lost nearly 1,200 points and suffered its biggest one-day point drop ever. On that day, the broader S&P 500 saw its fastest 10% decline from an all-time high. The Nasdaq also joined the major benchmarks in the correction territory.
In fact, last Monday, stocks saw heavy selling, with all major benchmarks suffering a staggering loss of more than 7%, marking their worst one-day percentage decline since 2008. And the Cboe Volatility Index (VIX), which mostly tracks implied volatility in the coming 30-day trading sessions, touched its highest intra-day level since 2008 on Monday. The Wall Street’s fear index now is on pace for a 280% jump so far this year, outstripping the 108% climb recorded during the financial crisis of 2008.
The Winning Strategy
As the broader market struggles for direction, thanks to the outbreak, investors should simply look for stocks that provide superb risk-adjusted returns. The best way to go about doing this is by creating a portfolio of low-beta stocks, which are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.
Also, defensive stocks seem to be the safest investment option. Such stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with activities in the larger market. Their products are in constant demand, irrespective of market volatility, and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as not many people will be willing to live without electricity, gas and water. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaffected by economic downturns.
To top it, such defensive stocks needs to be chosen that are solid dividend payers. This is because the best dividend stocks pay out healthy yields and have strong prospects, and are less susceptible to market gyrations. Their large customer base, sustainable business model, long track of profitability and strong liquidity allow them to offer sizable yields on a regular basis, regardless of market direction.
5 Solid Choices
We have selected five solid stocks from the aforesaid areas that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Atmos Energy Corporation ATO engages in the regulated natural gas distribution, and pipeline and storage businesses. The Zacks Rank #2 company has a beta of 0.34 and a dividend yield of 2.19%. The Zacks Consensus Estimate for its current-year earnings has moved up 0.6% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 6.6% and 8.1%, respectively.
Chesapeake Utilities Corporation CPK is a diversified energy company. The Zacks Rank #2 company has a beta of 0.34 and a dividend yield of 1.75%. The Zacks Consensus Estimate for its current-year earnings has moved 2% up over the past 60 days. The company’s expected earnings growth rate for the current year is 9.6%.
Sempra Energy SRE develops and operates energy infrastructure. The Zacks Rank #2 company has a beta of 0.57 and a dividend yield of 3.03%. The Zacks Consensus Estimate for its current-year earnings has risen 3.2% over the past 60 days. The company’s expected earnings growth rate for the next quarter and current year is 12.7% and 5.2%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Turning Point Brands, Inc. TPB provides tobacco products in the United States. The Zacks Rank #1 company has a beta of 0.47 and a dividend yield of 0.82%. The Zacks Consensus Estimate for its current-year earnings has advanced 5.1% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 9.3% and 10.2%, respectively.
The Procter & Gamble Company PG has a Zacks Rank #2. The company also has a beta of 0.45 and a dividend yield of 2.57%. The Zacks Consensus Estimate for its current-year earnings has climbed 0.8% over the past 60 days. The company’s expected earnings growth rate for the year is 10.2%.
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Sempra Energy (SRE) : Free Stock Analysis Report
Chesapeake Utilities Corporation (CPK) : Free Stock Analysis Report
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Atmos Energy Corporation (ATO) : Free Stock Analysis Report
Turning Point Brands, Inc. (TPB) : Free Stock Analysis Report
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