After a promising start to the year, every major U.S. stock index has dipped in February. Stocks have swooned this month in response to stubbornly high inflation, which economists expect will result in another round of aggressive interest rate hikes by the Federal Reserve later this year.
What does this mean for stock investors? The best stocks in this type of environment are arguably going to be defensive in nature. Defensive stocks are equities that are less sensitive to macroeconomic factors, resulting in fairly stable price performance in both bull and bear markets.
Here are three defensive plays that stand out as top buys right now.
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1. Eli Lilly
Eli Lilly (LLY -0.03%) is a megacap pharma company. As a top-shelf healthcare company, Lilly is widely viewed as an elite defensive stock due to the simple fact that patients rarely forgo life-saving medicines.
Last year, the drugmaker's shares gained 32.4% in response to its strong organic growth, its deep clinical pipeline, and a general flight to safety by investors. In 2023, Lilly's shares have underperformed the broader markets due to its premium valuation, a minor quarterly sales miss for its newly approved diabetes drug Mounjaro, and an initial marketwide rotation out of defensive stocks to start the year.
Lilly stock, though, appears poised for a healthy rebound over the balance of 2023. On the macro-trend side of the ledger, defensive stocks as a whole will likely start to rebound with another sizable interest rate hike in play. Growth-wise, industry experts expect Mounjaro sales to rapidly rise this year in response to broader insurance coverage and a possible weight loss label expansion. On the pipeline front, Lilly could nab a handful of high-value approvals in both immunology and dermatology this year.
All told, Lilly's recession-proof business model and stellar long term outlook bode well for its prospects in 2023 and beyond.
2. Lockheed Martin Corporation
Lockheed Martin (LMT 0.30%) is a large-cap defense industry company. Like Lilly's, Lockheed's shares stormed higher last year, gaining a whopping 36.8% as investors sought out companies with economically insensitive businesses. However, the defense contractor's shares have slid by 2.23% to start 2023, reflecting the initial optimism among investors that the Federal Reserve may taper future rate hikes. Hot inflation, additional rate hikes, and a possible global recession are three reasons Lockheed's stock is likely to reverse course soon.
Lockheed is a top defensive stock due to the predictability of its core business. The company derives approximately 70% of its annual revenue from contracts with the U.S. Department of Defense. Moreover, Lockheed is expected to earn substantial revenue from its F-35 program all the way out to 2070. The company thus offers shareholders a healthy long-term revenue stream, along with an above-average dividend yield of 2.52% (on an annual basis) at current levels. Taken together, these two factors ought to appeal to investors worried about another marketwide correction.
3. Verizon Communications
Verizon (VZ 0.43%) is the largest U.S. telecom company in terms of both scale and customer base. The company has earned a loyal customer base owing to its heavy investment in network strength over the past 15 years. Verizon, in short, is widely regarded as one of the most dependable wireless carriers in the United States. Part of its high quality can be attributed to the fact that Verizon avoided AT&T's costly mishap of attempting to build out a media empire. Instead, Verizon spent most of its capital on improving and extending existing networks.
What's Verizon offer as a defensive stock? While an economic recession might lead to more customers shifting toward low-cost carriers, Verizon's sheer scale and operational efficiencies should offset most, if not all, of this minor headwind from a profitability standpoint. That being said, Verizon doesn't offer shareholders much in the way of top-line growth. Year-over-year sales, after all, are only expected to climb by a modest 1.1% in 2024. This meager top-line forecast is a big reason the company's shares have struggled over the past several years (down approximately 30% over the prior 36 months).
Verizon, though, does sport a ginormous 6.49% annualized dividend yield. What's more, the company's shares are presently trading at under 9 times forward earnings, which is dirt cheap for a blue chip dividend stock. Verizon's enticing dividend yield and attractive valuation could make it a top safe haven for investors in this turbulent market. Having said that, this telecom stock is the riskiest of the bunch because the telecom space is less predictable than healthcare and the defense industry.
