Markets were volatile again last week, rocked by the Fed’s latest rate hike and the intention to keep rates high as it battles to curb inflation.
For investors, the immediate result means trying to cope with an uncertain economic climate and an unpredictable market. Anthony Saglimbene, chief market strategist of the trillion-dollar asset manager Ameriprise, has cast his eye on the situation, and is ready with advice on how investors can succeed.
First, Saglimbene believes that stocks have already priced in the strong chance of a recession next year, noting that the market is normally a leading indicator, by about five months. At the same time, he also believes that the near-term will offer solid opportunities for investors.
“Typically, October, November, and December is the best three-month period for the market for the year. This is a typically strong period and after such a big drop in the market this year, it wouldn’t surprise me if markets just rally through the rest of the year,” Saglimbene explained.
Heading into 2023, however, Saglimbene sees valuations declining. In his view, a combination of high inflation and rising interest rates will put headwinds in the way of growth and profits. The proper course for investors, he says, is to move into value stocks in defensive sectors, such as healthcare and consumer staples sectors.
We’ve followed that lead and found two stocks in the TipRanks database – one healthcare and one consumer staples – that could support Saglimbene’s thesis. So, let’s get into the details and see why they could make good additions to a portfolio right now.
CVS Health Corporation (CVS)
We’ll start in the healthcare sector, which Saglimbene has described as, “a better kind of tweener — it has some growth and has some defense,” and take a look at American healthcare giant CVS Health.
The company provides pharmacy services, telehealth treatment, prescription coverage for chronic diseases, and health insurance products and related services. These are offered via several segments: Pharmacy Services, Retail or Long-Term Care, Health Care Benefits, and Corporate/Other. As of the end of last year, the company handled roughly 9,900 retail locations and 1,200 MinuteClinic spots, as well as LTC pharmacies, onsite pharmacies and online retail pharmacy websites. The fact this is an industry giant is evident from the employee count which numbers ~216,000.
In a year in which stocks have been put through the wringer, CVS has mostly avoided the carnage. While the shares are down by 2% year-to-date, that is a far better look than the S&P 500’s 21% decline.
Strong earnings have helped support the stock and the company beat expectations when it reported Q3 results last week. Revenue rose by 10% year-over-year to of $81.2 billion, coming in $4.42 billion above the consensus estimate. On the bottom-line, adj. EPS of $2.09 beat the analysts’ $1.99 forecast. Even better, for the third time this year, the company raised its adj. EPS guidance for the full year from the range between $8.40 to $8.60 to between $8.55 to $8.65. Consensus had $8.55.
Assessing the company’s prospects, J.P. Morgan’s Lisa Gill expects CVS to keep on delivering. The 5-star analyst writes, “We are positive on the company’s integrated healthcare model (retail pharmacy, PBM, health plan, specialty, retail clinics) and believe the company’s broad suite of services, strong clinical capabilities, and continuity of care across care settings position it well to benefit from changing market dynamics over the longer term, including new reimbursement models (the shift to value-based care) and the ‘retailization’ of healthcare. We view CVS as a partner of choice, which should lead to a greater share of spend across its various channels over time and positively contribute to overall enterprise profitability.”
To this end, Gill has an Overweight (i.e., Buy) rating on the shares, backed by a $125 price target, suggesting 12-month upside of 25%. (To watch Gill’s track record, click here)
None of Gill’s colleagues have an issue with her prognosis; the stock claims a unanimous 12 positive reviews which naturally all coalesce to a Strong Buy consensus rating. The forecast calls for one-year returns of 21%, considering the average price target stands at $120.08. (See CVS stock forecast on TipRanks)
Philip Morris (PM)
For the next stock on our list, we’ll look at Philip Morris, a leader in the tobacco industry. Its products are consumer staples – but it’s also the classic ‘sin stock,’ a defensive niche. This fits with Saglimbene’s comments on the sector: “Staples are really expensive, but I think tactically — which when we look at our window of time is six to 12 months — you want to be a little bit more defensive… Staples traditionally move higher when markets are coming down…” So let’s look under the hood of Philip Morris, and see just what defensive attributes it brings.
To start with, the company has recognized the increasing social pressures against smoking, and how that will impact its chief product lines. Philip Morris is moving to adapt by shifting toward alternative products, especially those that are smokeless. These include vapes, heated tobacco lines, and even oral nicotine pouches. They are all marketed as safer, less smelly, and less intrusive than smoking – addressing many of the social issues against cigarettes – while at the same time helping customers to quit smoking – without losing them as customers.
We can look at PM’s recent 3Q22 report to gauge how well the company is performing at these goals. For the third quarter, the adjusted EPS came in at $1.53, some distance ahead of the Street’s call for $1.36.
Total revenue in Q3 was reported at $8.03 billion, higher than both Q1 and Q2 of this year – but slipping 1.1% y/y, although still coming in $730 million higher than the analysts’ prediction. The company finished the quarter with over $5.3 billion in cash, up from $4.5 billion in the year-ago period.
Along with earnings, Philip Morris also announced that it had raised its quarterly dividend payment by 1.6%, or 2 cents, to $1.27 per share. This marked the third dividend increase in the last three years. At the new rate, the payment annualizes to $5.08 per common share and gives a yield of 5.7%. That yield is more than 2.5x higher than the market average, and about 2/3 the current rate of inflation. These attributes, combined with a 14-year history of reliable payments, make the dividend an attractive defensive feature for investors seeking to protect their portfolios.
Philip Morris is part of Morgan Stanley analyst Pamela Kaufman’s coverage universe, and she takes a bullish stand on the stock. Kaufman is especially impressed by the company’s move into smokeless heated tobacco products, such as the upcoming new iQOS line. She writes, “[We] expect PM to launch IQOS in the US in spring 2024. PM’s impending entry into the US offers an attractive growth opportunity as the US is one of the world’s largest tobacco profit pools (~$20 billion in 2021), with ~31 million smokers. IQOS will benefit from PM’s early mover advantage in the heat-not-burn (HNB) category in the US, its reduced risk tobacco product designation (MRTP) from the FDA, and PM’s extensive marketing learnings from other markets. IQOS has a demonstrated track record of success across markets, generating $9 billion in revenue in 2021.”
In-line with her outlook, Kaufman rates PM shares as Overweight (Buy), backed by a $109 price target to indicate the stock has room for 21% growth in the coming year. (To watch Kaufman’s track record, click here.)
With 4 Buy ratings set recently, against 2 Holds, Philip Morris gets a Moderate Buy rating from the analyst consensus. The $105 average price target suggests a 17% one-year gain from the current trading price of $89.98. (See Philip Morris’ stock forecast at TipRanks.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.