In the ever-changing landscape of the stock market, finding a balance between safeguarding your portfolio and maximizing gains is crucial. Typically, investing in "defensive" stocks ensures protection against potential recessions, but often comes at the cost of limited growth. However, there is good news: Morgan Stanley equity strategists have identified defensive stocks that not only offer protection but also have the potential for substantial returns.
Despite the current market's resilience, the looming risk of a recession demands cautious consideration. Earlier this year, many on Wall Street predicted an impending recession due to the Federal Reserve's implementation of interest-rate hikes. These hikes were intended to curb inflation by restricting economic demand, but demand has surprisingly remained steady. Nevertheless, the delayed effects of higher interest rates could eventually lead to slower economic growth and a possible recession in the coming year.
Given these circumstances, investors are increasingly seeking protection through defensive stocks. These stocks, compared to the broader market, often exhibit lower volatility. They are frequently found in sectors that are less susceptible to declines in consumer and business spending. Industries like groceries, household products, healthcare insurance, pharmaceuticals, and utilities exemplify stability during uncertain times. Additionally, many of these companies provide dividends as an added incentive. However, it is important to note that some of these businesses are more mature and may offer less potential for growth, even when the economy is performing well.
This is where Morgan Stanley's expertise comes into play. By using a systematic screening process, they have identified companies from the 1,000-largest market capitalizations that possess below-average volatility over the past 252 days. As part of their selection criteria, these stocks must be classified as "growth stocks" according to the bank's statistical model and have received Overweight ratings from the corresponding Morgan Stanley analysts. Notable names on their list include Apple (AAPL), Boston Scientific (BSX), Costco Wholesale (COST), and Monster Beverage (MNST), which is a recent addition to Morgan Stanley's stock picks.
In conclusion, investing in defensive stocks has traditionally been about compromising potential growth for protection. However, with the help of Morgan Stanley's rigorous screening process, investors can now have the best of both worlds. These carefully selected stocks offer the stability and resilience needed to weather uncertain economic times while still providing the potential for significant returns. As the market continues its unpredictable trajectory, diversified portfolios that include defensive stocks with growth potential will be well-positioned to thrive.
UnitedHealth Group: A Thriving Health Insurance Company
UnitedHealth Group (UNH) is a leading player in the health insurance industry. Even in times of financial strain, people prioritize their health, making health insurance a non-negotiable expense. Analysts are optimistic about the company's growth prospects, expecting annualized sales growth of approximately 8% over the next three years, surpassing $463 billion in 2026 according to FactSet. This growth can be attributed to the continuous influx of nearly a million new Medicare advantage members each year.
Additionally, UnitedHealth Group is poised to improve its profit margins in the coming years. The medical-cost ratio, which measures the percentage of revenue allocated to patient care expenses, is expected to decrease after catching up on elective procedures this year. As a result, earnings-per-share are projected to grow by around 12% annually, reaching approximately $35.71 by 2026.
Considering its attractive growth potential, UnitedHealth stock may be an appealing investment opportunity. Currently trading at around 18.7 times earnings-per-share estimates for the next year, it offers a valuation slightly above the S&P 500 at 18 times earnings. However, UnitedHealth's earnings are anticipated to outpace aggregate earnings for the index, which could boost the company's stock value.
Colgate-Palmolive: A Resilient Personal Hygiene Brand
Another noteworthy stock worth considering is Colgate-Palmolive (CL). As consumers prioritize personal hygiene regardless of their financial situation, this well-established brand is expected to sustain annual sales growth slightly above 4% by 2026, reaching $21.9 billion. The company recently implemented minor price increases, but anticipates revenue growth primarily driven by higher sales volumes. Moreover, management aims to control costs going forward, with analysts predicting operating margins will rebound to pre-pandemic levels.
Benefiting from these factors, Colgate-Palmolive is projected to achieve earnings-per-share growth of approximately 8% annually over the next three years, reaching around $3.99 by 2026. It is important to note that the stock currently trades at a premium, with a forward earnings multiple of 21. However, in the event of a recession, consumer-staples names like Colgate-Palmolive may retain their valuation as investors seek shelter in stable industries.
Considering these factors, both UnitedHealth Group and Colgate-Palmolive present compelling investment opportunities in their respective sectors.
Originally written by Jacob Sonenshine.
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