2 Defensive Stocks to Consider With Market Conditions Turning More Bearish

The stock market has given back the bulk of its gains following a stronger than expected inflation print. Amid these challenging circumstances, investors should consider high-quality, defensive stocks like Elevance Health (ELV) and Northrop Grumman (NOC).

The stock market has now given back the bulk of its 18% rally from the mid-June lows. The catalyst for the move higher from mid-June was the possibility of inflation numbers rolling over which would be the harbinger of the Fed slowing down on its rate hikes and the unwind of extreme readings in short interest and bearish sentiment. A contributing factor was the resilience of corporate earnings and economic data despite some adverse conditions.

However, these conditions are going to get even more difficult after the latest inflation data which will likely push rates higher and for a longer period of time. The Fed wants to see inflation decline in a meaningful and sequential manner before it considers relaxing its current hawkish stance. There was some inkling that this could be happening based on July’s data and continued weakness in gasoline prices, freight rates, and vehicle prices in August.

These were more than offset by increases in other components. And, the Fed’s preferred measure - core CPI - actually accelerated on a monthly level. This means the bullish tailwind of falling inflation is weakening, while the bearish headwind of a hawkish Fed is getting stronger. Amid these challenging conditions, here are 2 defensive stocks that investors should consider:

Elevance Health (ELV)

ELV is a managed care company, providing medical benefits to roughly 44 million members. The company offers employer, individual, and government-sponsored coverage plans. It is also the largest single provider of Blue Cross Blue Shield branded coverage. This sector has also been particularly strong due to a low unemployment rate which means that the company has seen strong growth in enrollees. 

Further, the pandemic was a boost to its bottom line as less people were going to the doctor and undergoing procedures. Therefore, the company’s payout ratio declined. Many analysts had been expecting an above-average reading as the economy normalized, but so far this has simply returned to pre-pandemic levels.

Another reason to like managed care stocks is their pricing power as healthcare spending tends to rise at a faster pace than inflation. And, they tend to be less affected by economic slowdowns. Currently, the company is seeing growth from its Medicare Advantage plans and virtual care services. 

Last year, the company had $25.98 in EPS and $136.9 billion in revenue. This year, analysts are forecasting $28.61 in EPS and $153.8 billion in revenue, increases of 10.1% and 12.3%, respectively. And, they see more growth in 2023 - 13.3% for EPS and 5.2% for revenue.

With these attributes, it’s not surprising that ELV has an overall grade of A, which translates into a Strong Buy rating in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. 

It also evaluates stocks by select factors to generate component grades to give investors more insight. ELV has a B for Sentiment as 14 out of 17 Wall Street analysts covering the stock have a Buy rating with a consensus price target implying 13% upside. ELV is ranked #1 in the B-rated Medical – Health Insurance industry. For more top stocks in this industry, click here.

Northrop Grumman (NOC)

NOC is one of the largest aerospace and defense contractors in the world with a $71 billion market cap. The company operates through 4 segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems. Its largest source of revenues is providing aircraft systems with tactical intelligence, weapon and mission systems for the military, radar, electro-optical/infrared, and acoustic sensors.

NOC certainly fits the criteria of a defensive stock as the company has consistently grown its revenues, earnings, free cash flow, and dividends. Over the last decade, each of these metrics is higher by 138%, 273%, 174%, and 207%. This is because defense spending continues to grow on an aggregate level, and NOC is one of the premier stocks in the sector.

Despite being a defensive stock, NOC does offer growth upside given its exposure to the space industry. Its customers include NASA and telecommunications companies as it provides services related to space logistics, satellite launches and maintenance, space security, and propulsion systems. Overall, the space industry is expected to reach a size of $1 trillion by 2040 and grow at a double-digit rate. 

NOC’s promising prospects are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. Given that the majority of Wall Street analysts covering the stock have a Buy rating and a history of dividend hikes, it’s not surprising that it has a B grade for Quality and Stability. Click here to see NOC’s complete POWR Ratings. 

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NOC shares closed at $485.20 on Friday, up $0.12 (+0.02%). Year-to-date, NOC has gained 26.76%, versus a -18.22% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.


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