When the market is roaring higher, volatile upswings can be a lot of fun for investors. Not so much on the downside, as stocks tend to fall faster than they rise. That's exactly what's been occurring on Wall Street as of late, with many growth stocks down substantially from their highs. Even some top-tier companies are trading at levels around their 52-week lows.
Danaher (DHR 0.83%), Lockheed Martin (LMT 1.07%), and American Water Works (AWK 1.55%) are fundamentally strong businesses with track records of performing well through thick and thin. Here's what makes each of these value stocks a great buy now.
Protection from another pandemic-propelled market plunge
Lee Samaha (Danaher): There's no avoiding the fact that the market sold off recently on fears over the new omicron COVD-19 variant. It's not just that the market has to factor in the possibility that omicron could prove even more problematic than delta. Investors also have to deal with the consequences of fear as governments, people, and corporations anticipate that possibility, and act on those fears.
That's where Danaher comes in. The life sciences and diagnostics company has been a beneficiary of the increase in diagnostic testing and the intensified research into vaccines and therapies. Within its portfolio, Danaher has diagnostic tests for coronavirus, flu, and respiratory illnesses. Meanwhile, its life sciences tools are used by those who research vaccines and therapies. So it stands to reason that if the pandemic is further extended, it will mean more revenue for Danaher.
Beyond that, though, the pandemic has enhanced Danaher's long-term growth prospects. For example, the boost to its diagnostic platform sales created by clients needing the ability to perform coronavirus tests has established many new customers for the company's other tests.
Meanwhile, the research funding that has gone into fighting the pandemic will likely spur developments in new areas that Danaher will benefit from. Furthermore, the shock of the pandemic is likely to change long-term thinking on medical matters, and funding for research should become more accessible.
As such, Danaher would make an excellent stock for investors looking to hedge their portfolios against the possibility of a more prolonged pandemic.
An ideal income stock
Daniel Foelber (Caterpillar): Sometimes, when a company is going through a transition, it's best for management to pull its pessimism into the foreground, rip the proverbial bandage off, and lower its guidance. That's exactly what defense contractor Lockheed Martin did when it reported its third quarter earnings on Oct. 26. All four of Lockheed's segments posted weak top-line results. The company is now forecasting little to no growth for 2021 and 2022. However, there's reason to believe that Lockheed's investments in hypersonic missiles, space (mainly through satellites), and other products and systems will eventually work out.
As bad as Lockheed's medium-term growth picture looks, it's about the only wart on an otherwise blemish-free company. Since most of its business is tied to long-term government contracts, its performance isn't subject to much variability, and investors aren't going to get many surprises. Put another way, Lockheed's business won't just crash even if the broader economy sputters. This was demonstrated in 2020, when Lockheed posted its best year ever while other industrial companies were floundering.
Consistent performance and predictable spending allow Lockheed to generate gobs of free cash flow, much of which it uses to pay dividends and buy back stock. Some companies with greater opportunities for growth also generate a lot of FCF, but reinvest those funds in the business rather than doling them back out to shareholders. Lockheed, though, recognizes that defense spending will only grow so much.
Its combination of predictable FCF and years of dividend raises make it one of the best dividend stocks on the market today. At its current share price, Lockheed has a dividend yield of 3.4%, which is higher than any of its defense industry peers.
The shares are trading now at levels lower than they have been for most of 2021, and at a price-to-earnings ratio of just 15.2. For income investors and those who want to own stocks that are less exposed to market volatility, now could be a good time to hop into Lockheed.
Quench your thirst for a hedge against volatility
Scott Levine (American Water Works): When investors fear that increased market turbulence is imminent, they'll often seek to make some defensive moves to fortify their portfolios. For some, that may mean building a bigger cash position, while others may get a hankering for gold bullion. Those tactics are fine, but there are other wise moves one can make. One that I'd recommend is to gain some exposure to utility stocks like American Water Works. The largest publicly traded water utility by market capitalization, American Water Works provides water and wastewater treatment -- indispensable needs -- to 15 million people in 46 states.
While investors may be selling off shares of more speculative companies, American Water Works is as predictable as they come. Its primary business is in regulated markets. In the third quarter, for example, it reported revenue of $1.09 billion, of which its regulated business accounted for 86.4%. Consequently, management has good insight into future cash flows and is able to plan its capital expenditures accordingly. The company's latest investor presentation touched on this fact when management revealed its plan to allocate between $3 billion and $4 billion to acquisitions from 2022 through 2031.
The markets may dip and rise and dip again. Those oscillations, however, shouldn't prevent American Water Works from hitting its near-term growth forecasts. The company is guiding for earnings per share (EPS) to rise at a compound annual rate of 7% to 9% from 2022 (when it expects EPS of $4.39 to $4.49) to 2026. Similarly, the company aims to grow its dividend by 7% to 10% annually while maintaining a conservative payout ratio of 55% to 60%.
For investors who don't want to lose sleep worrying about market volatility, American Water Works stock is certainly worth dipping a toe into.