Although U.S. equity markets have been ticking higher in 2023, the central bank's aggressive rate hiking policy may trigger another sharp correction in stocks. Keeping with this theme, Federal Reserve Chair Jerome Powell said Tuesday that the bank is considering raising interest rates faster and farther than previously anticipated in order to tamp down inflation.
How should stock investors prepare for a possible marketwide downturn? Defensive stocks could be a good way to protect your portfolio from downside risk. During market-wide pullbacks, companies with stable and growing free cash flows, economically insensitive business models, and rock solid balance sheets tend to outperform other asset classes.
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Which defensive stocks are top buys right now? Here are two names that should lift your portfolio in troubled times.
1. Axon Enterprise
Axon Enterprise (AXON 1.40%) is a personal protection and law enforcement technology company. The company is best known for its conducted energy devices such as the Taser. But Axon's biggest commercial opportunities actually lie in the areas of digital evidence management, real-time operations, and body cameras. The core reason is that law enforcement agencies, defense attorneys, and prosecutors are increasingly leaning on integrated software/hardware bundles in their daily workflows.
Why is Axon a top-notch defensive stock? Axon sports a vast client base of state, federal, and international law enforcement agencies, as well as top-shelf private companies. What's more, the average length of its customer contracts currently exceeds five years.
In addition, Axon is benefiting from the ongoing digitization of public safety measures and the gradual transition away from lethal weaponry in law enforcement. As such, the company's revenue stream is both economically insensitive and poised for enormous growth in the years ahead.
Underscoring this point, Wall Street expects Axon's top line to rise by nearly 40% over the next 24 months. Now, the company's shares aren't cheap at 73 times forward earnings. But Axon's stock arguably deserves a rich premium in light of its dependable revenue stream, favorable tailwinds, and stellar long-term outlook.
2. NovoCure
NovoCure (NVCR -0.08%) is an anti-cancer medical device specialist. The company sports a unique platform technology known as Tumor Treating Fields (TTFields). This novel platform employs electrical fields to eliminate cancer cells through a variety of mechanisms (disruption of cell division, cell migration, etc.).
NovoCure currently has two Food and Drug Administration (FDA) approved products designed to be used in conjunction with standard forms of chemotherapy: Optune for newly diagnosed and recurrent glioblastoma (a hyper-aggressive form of brain cancer) and Optune Lua for malignant pleural mesothelioma (a cancer of the lining of the lungs). These anti-cancer devices are also commercially available in the European Union, as well as a handful of other countries.
What makes NovoCure a standout defensive play? NovoCure's FDA-approved products have become an essential part of the treatment landscape for glioblastoma and malignant pleural mesothelioma. So, while Optune and Optune Lua's sales have slowed in recent years, the company does sport a highly dependable revenue stream that is largely unaffected by the broader economy.
But there's so much more to this story. NovoCure's late-stage pipeline could open up multiple multibillion-dollar markets in the near future. In 2023 alone, the company expects to announce pivotal trial results in both lung and ovarian cancer. Taken together, these two high-value indications could drive an exponential increase in the medtech company's top line in the years ahead.
All told, NovoCure's shares have the potential to deliver market-beating returns over the next several years, regardless of what happens in the broader economy.
