9 Cheap Defensive Stocks
The earnings of these companies are less sensitive to the economy—and their stocks are undervalued, too.
- Defensive sectors are holding their value better than others during this year’s market volatility.
- Our stock picks in the alcoholic-beverage industry are trading in the 5-star range.
- The utilities sector is leaning into the overvalued side.
Hi, I’m Dave Sekera, the chief market strategist here at Morningstar.
Thus far this year, defensive sectors have held their value better to the downside. Sector valuations among the defensives are largely in line with a composite of the fair values of the underlying stocks that we cover in each of those individual sectors. However, I would note that the utility sector is slightly on the overvalued side. These stocks in the consumer defensive sectors have benefited as investors are becoming increasingly concerned that the U.S. economy is weakening enough that we could soon be entering a recession, and of course earnings among the defensive sectors are less sensitive to economic variability.
Please take a look at your screen to see our analysts' top picks.
Most of these nine stocks fall into undervalued territory. Data as of July 12, 2022.
1) Beyond Meat (BYND)
2) Boston Beer (SAM)
3) The Hain Celestial Group (HAIN)
4) AptarGroup (ATR)
5) Illumina (ILMN)
6) Moderna Therapeutics (MRNA)
7) Edison International (EIX)
8) Entergy (ETR)
9) Dominion Energy (D)
I'd note that within the consumer defensive sector, we find that stocks of alcoholic-beverage manufacturers remain undervalued. As consumers begin to venture back out into public events, we expect that consumption will shift from at-home to on-premises, and in on-premises consumption, consumers typically imbibe higher-margin branded products.
In our other top picks, especially those in the healthcare sector, those picks are more idiosyncratic in nature, where we have a differentiated view on the underlying growth potential for the specific company than what we see in the market consensus.
Among the utilities sector, that certainly provided investors with a safe haven in a turbulent market year to date. However, we do expect inflation to begin to moderate later this year. We do caution that valuations in the utility sector would be the most at risk if inflation persists longer than expected. Utilities are the most sensitive sector to inflation, mainly because of their mostly fixed revenues, large capital investment budgets, and borrowing needs.
For greater detail on our analysis for any of these stocks and for the other companies we follow, please visit Morningstar.com.