3 Stocks to Buy With Rising Recession and Rate Risk

3 Stocks to Buy With Rising Recession and Rate Risk

The stock market continues to face challenges with rising rates being a major headwind. The economy has been stable enough that earnings growth has not fallen, but this is unlikely if the Fed keeps its hawkish attitude. This article will discuss the characteristics of stocks which are likely to outperform, and 3 stocks with such characteristics – Lockheed Martin and Vertex Pharmaceuticals VRTX and Elevance Health ELV.

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The stock market dove lower following the FOMC press conference where Chair Powell made it clear that even if the Fed were to slow its pace of hikes, the job is nowhere close to completion. The consensus was that the “terminal rate” of this hiking cycle would increase after the meeting, with 5.5% now the consensus.

Of course, the higher the terminal rate, the more pain that will be inflicted on the economy especially in areas like finance, housing, and real estate. Bonds will likely suffer and there is a greater chance of liquidation if borrowers cannot meet their obligations. This is more likely in a high rate world. Stocks could also be affected by earnings declines.

These environments mean that investors have to be extremely judicious in terms of making their selections. Investors should avoid stocks with prospects that are tied to short-term economic and monetary factors.

Lockheed Martin (LMT)

LMT is a security and aerospace company that has four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space. The company produces high-tech weapons and defense systems but is best known for its F-35 fighter jets. LMT also offers a wide range of services to governments around the world.

In terms of the current environment, LMT is an ideal selection to “beat’ the bear market. One, defense spending and government budgets are less volatile than other areas of the economy. In fact, defense spending, on a global level, has grown at about an average, annual rate of 5% over the last couple of decades with the only dip being during the dissolution of the Soviet Union in the early 90s.

Second, companies like LMT often receive long-term contracts and only have a few competitors given that these projects are quite sophisticated and require security clearance. They have large balance sheets and a history of paying and raising dividends. This can also lead to them outperforming during economic turmoil.

LMT has an overall B rating, which translates to a Buy in our POWR Rating system. B-rated stocks have posted an average annual performance of 20.1% which compares favorably to the S&P 500’s annual performance of 8.0%.

In terms of component grades, LMT has a B for Value due to its forward P/E of 14 which is cheaper than the S&P 500 (and less prone to negative revisions). A B is also given to LMT for quality due to its status as a leading aerospace and defense company. Click here to see more of LMT’s POWR Ratings.

Vertex Pharmaceuticals (VRTX)

VRTX discovers and develops small-molecule drugs for the treatment of serious diseases. The company’s most important drugs include Symdeko and Symdeko for cystic fibrosis. Vertex therapies are still the gold standard in this area. The company is also focused on the development of treatments for pain, type 1, diabetes, inflammatory diseases and influenza.

The company’s cystic fibrosis drugs are poised to continue dominating the market for the foreseeable future due to the disease-modifying potential of the drugs, consistent use by patients, and very little competition. VRTX combination therapies have long patents that protect their cystic fibrosis portfolio against generics. There is also potential for its noncysticfibrosis pipeline. It has exposure to promising areas such as AAT deficiency and sickle cell disease.

VRTX has an overall grade of A which equates to a strong Buy rating in the POWR Ratings service. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500’s average annual gain of 8.0%.

VRTX also has strong component grades including an A for Quality due to 11 out of 19 analysts covering the stock having a Strong Buy rating with only 2 having a Sell rating. It is also regarded as one the most important companies in the space because of its dominance in the CF market, strong pipeline of potential blockbuster treatments, and high stock price. Click here to see more of VRTX’s POWR Ratings.

Elevance Health (ELV)

ELV is a managed care company, providing medical benefits to roughly 44 million members. The company offers a variety of coverage plans, including individual, government, and employer-sponsored. It is also the largest provider of Blue Cross Blue Shield brand coverage. This sector has also seen strong growth due to a low unemployment rate.

Further, the pandemic was a boost to its bottom-line as less people were going to the doctor and undergoing procedures. The company’s payout ratio fell as a result. Analysts had expected a higher payout ratio as the economy stabilized, but it has 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. They are also less affected by economic slowdowns. The company is currently seeing growth from its Medicare Advantage plans, virtual care services, and other programs.

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.

LMT shares . Year-to-date, LMT has gained 38. 22%, versus a -19. 84% 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 find 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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