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Brave the Market Correction With These 6 Defensive Stocks

Zacks

Investors’ woes continued on Thursday after U.S. markets officially entered correction territory. Fears emanating from the increase in interest rates and new-found volatility continued to weigh on market sentiment. These concerns, which caused Monday’s losses, continued to haunt the markets on a day when both the Dow and the S&P 500 went into correction mode for the first time in two years.

At this point, opinion is divided over whether this is only a healthy correction or the beginning of what could become a full-fledged bear market. What is certain is that fear has made a comeback to the markets and a few weeks of volatile trading are more than likely. In such an environment, investors would do well to invest in defensive stocks that have the ability to protect past gains during the rocky trading sessions ahead.

Rising Yields Spike Markets’ Rally

During this week, the 10-year Treasury yield has moved above 2.85% twice. Both these instances have been followed by wide-spread losses for stocks. On Wednesday, the 10-year U.S. Treasury note increased from 2.843% to 2.851%, marginally lower than the highest level witnessed in early 2014. Meanwhile, average year-on-year hourly earnings for January increased to 2.9%, the highest since June 2009.


The record increase in wages led to concerns that retail prices would increase. Such fears, taken together with soaring yields, led to speculation that the pace of rate hikes would likely quicken over the year.

This is the phenomenon which is believed to be responsible for stocks entering correction mode. The collapse in volatility-related investments, attributable primarily to algorithmic trading, was no less responsible for the plight.

Massive Loss in Market Value

The scale of recent losses can be gauged from the amount of market value erased since the S&P 500 hit a record high on Jan 26. A total of $2.49 trillion in market value has been erased since then, mostly during this week’s sharp declines. The situation for global markets is even grimmer. Nearly $5.2 trillion has been erased worldwide since most of these bourses were mimicking the gains of U.S. markets.

The question haunting investors at this point is whether the current situation has the makings of a bear market. With markets already in correction mode, we are possibly looking at another four months of losses and uncertainty, per historical data. However, if a bear market ensues, during which markets will lose another 10%, then 22 months would pass until the market scales January’s highs once again. Such a possibility, though unlikely at this time, does continue to exist.

Our Choices

Markets have just entered correction mode and investors are continuing to grapple with surging bond yields and the specter of a faster-than-expected increase in interest rates. Meanwhile, the market’s fear gauge continues to creep up, leading to losses for volatility-related bets, which in turn are triggering greater uncertainty.

Against this backdrop, investors would do well to invest in defensive stocks. Such stocks provide steady earnings and dividends irrespective of prevailing market conditions. Typically, utilities and consumer staples, whose demand remains undiminished even during tough times, are considered to be defensive stocks. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

The Boston Beer Company Inc. SAM is the largest craft brewer in the United States.

Boston Beer has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 15.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.9% over the last 30 days.

Service Corporation International SCI is North America's leading provider of deathcare products and services.

Service Corporation has a Zacks Rank #1. The company has expected earnings growth of 10% for the current year The Zacks Consensus Estimate for the current year has improved more than 5.1% over the last 30 days. The stock has a dividend yield of 1.6%.

Meredith Corporation MDP is one of the leading media and marketing companies in the United States, with interests in publishing, broadcasting, integrated marketing and interactive media.

Meredith has expected earnings growth of 16.3% for the current year. The Zacks Consensus Estimate for the current year has improved 37.2% over the last 30 days. The stock has a dividend yield of 3.7% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pampa Energía S.A. PAM is the largest fully integrated electricity company in Argentina.

Pampa Energía has a Zacks Rank #1. The company has expected earnings growth of 64.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.7% over the last 30 days.

Exelon Corporation EXC is a utility services holding company.

Exelon has a Zacks Rank #2 (Buy). The company has expected earnings growth of 13.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.4% over the last 30 days. The stock has a dividend yield of 3.6%.

National Grid plc NGG is engaged in the transmission and distribution of natural gas and electricity.

National Grid has a Zacks Rank #2. The Zacks Consensus Estimate for the current year has improved 14.8% over the last 30 days. The stock has a dividend yield of 3.3%.

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