The recent sell-off in U.S. stocks, which gained momentum in August, has intensified as October unfolds. On Tuesday, the Dow Jones Industrial Average ($DOWI) experienced a decline of over 400 points, pushing it into negative territory for the year. The S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX) have also seen declines amid the recent heavy selling. Despite these setbacks, both indices remain in positive territory for 2023, thanks to a strong first-half rally.
October, historically known for its market volatility, has lived up to its reputation in 2023. Investors are growing apprehensive as rising bond yields, with the 10-year yield reaching a 16-year high of 4.8%, are sparking concerns of a potential short-term increase to 5%.
Rising bond yields have taken a toll on growth stocks, primarily because their earnings are often projected into the future. When these future earnings are discounted at higher rates, their current value diminishes. One striking example of this is the decline in the ARK Innovation ETF (NYSE:ARKK), managed by Cathie Wood, a prominent figure in growth investing. ARKK has plummeted by more than 26% from its 2023 intraday high of $51.33, which is notably worse than the broader market indices’ performance over the same period.
Given the ongoing market turbulence, some investors are seeking refuge in defensive stocks. These stocks typically have more predictable earnings trajectories and aren’t heavily reliant on the macroeconomic environment. Defensive stocks often come with healthy dividend yields, adding an extra layer of stability to their returns. Here are three defensive stocks that appear to be attractive options in the current market climate:
Pfizer Stock
Pfizer’s stock (NYSE:PFE) is currently trading near its 52-week lows, and it has lagged behind the broader markets for some time, partly due to decreased demand for its COVID-19 vaccines. Additionally, Pfizer faces a “patent cliff” as patents for several of its medicines are set to expire soon. However, the company is actively pursuing growth opportunities, such as its acquisition of Seagen to bolster its cancer portfolio. With a next 12-month (NTM) price-to-earnings (PE) ratio of 11.8x and a nearly 5% dividend yield, Pfizer represents an attractive defensive play, given its modest valuations and potential growth from its pipeline.
Coca-Cola Stock
Coca-Cola (NYSE:KO) is a classic defensive stock that tends to perform well regardless of economic conditions. The demand for its products remains stable, and its strong brand provides pricing power, even during times of rising inflation. Trading at an NTM PE multiple of 20.4x, which is below its 3-year average and that of its rival PepsiCo (PEP), Coca-Cola offers a stable business model, a consistent dividend policy, and reasonable valuations, making it an appealing choice for conservative investors.
Berkshire Hathaway Stock
Berkshire Hathaway (BRK.B), a conglomerate with diverse business holdings, including Apple (NASDAQ:AAPL), stands as a formidable defensive option. Chair Warren Buffett’s investment philosophy emphasizes long-term value, and the conglomerate has built a portfolio of well-managed subsidiaries. Despite being among the top 10 U.S. companies, Berkshire Hathaway often flies under the radar for many analysts. With a cash pile of $147.2 billion as of June and an NTM enterprise value-to-earnings before interest tax, depreciation, and amortization multiple of 13.5x, the stock presents an intriguing opportunity for defensive investors. The ongoing market downturn could facilitate Buffett’s deployment of cash for strategic investments, further enhancing the stock’s long-term prospects.
Conclusion
In summary, amid the prevailing market volatility in October, these three defensive stocks—Pfizer, Coca-Cola, and Berkshire Hathaway—offer investors opportunities to safeguard their portfolios while maintaining the potential for growth and stability in challenging times.
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