Worried About a Market Correction? Consider Investing in These 3 Defensive Stocks

Analysts expect major benchmark indexes to retreat in the coming months, after hitting record highs in the first half of 2021, owing to the rapid spread of the COVID-19 Delta variant and decelerating economic growth. However, non-cyclical defensive companies Merck & Co., Inc. (MRK), CVS Health Corporation (CVS), and Waste Connections, Inc. (WCN) are expected to continue growing even amid an economic slowdown. So, we think these stocks could be solid bets now. Let’s discuss.

The stock market is currently at risk of a correction because the rapid spread of the COVID-19 Delta variant threatens the fast-paced economic recovery.  According to a note from Morgan Stanley strategists, “Market breadth has been deteriorating for months and, in our opinion, is just another confirmation of the mid-cycle transition. It usually concludes with a material (10-20%) index level correction.”

Decelerating economic growth and declining money supply are expected to be the major factors driving a market correction. Analysts also expect a deceleration in corporate profits this earnings season, which increases the probability of a broad market pullback. The Fed’s sooner-than-expected tapering plans have also tempered market sentiment. In this regard, Invesco analyst Kristina Hooper said, “We’re in something of a precarious period…because we’ve gone so long without any kind of significant sell-off for the stock market. In addition, we’re watching the Fed try to maneuver into a very different position…There’s always a risk when you have a market that has been driven largely by the Fed.”

Bearish market sentiment is expected to affect the booming cyclical stocks the worst as investors rotate toward defensive stocks with proven ability to withstand pullbacks. Furthermore, these companies generally operate in the production and supply of goods and services with relatively inelastic demand, ensuring stable revenue and earnings growth irrespective of decelerating economic recovery. So, because fundamentally sound defensive companies Merck & Co., Inc. (MRK), CVS Health Corporation (CVS), and Waste Connections, Inc. (WCN) are expected to witness stable growth in the near term, we think it could be wise to bet on these stocks now.

Merck & Co., Inc. (MRK)

MRK in Kenilworth, N.J. is one of the largest pharmaceutical companies in the United States. It is included in  the benchmark S&P 500 index and is ranked #65 on the Fortune 500 list. The company operates in two segments—Pharmaceutical and Animal Health. Also, MRK has an international market presence and intricate supply chain that comprises drug wholesalers, retailers, healthcare organizations, and government agencies.

MRK’s sales increased marginally to $12.08 billion in its  fiscal first quarter, ended March 31, 2021. Its sales  of its KEYTRUDA drug increased 19% from its  year-ago value to $3.90 billion. In addition, Lynparza sales rose 57% from the same period last year to $228 million, while revenues from its  Animal Health segment increased 26% from the prior-year quarter to $1.42 billion. Its net income and EPS came in at $3.19 billion and $1.25, respectively, over this period.

Several MRK drugs have received FDA approval recently. On July 22, the FDA approved MRK’s anti-PD-1 therapy drug KEYTRUDA combined with LENVIMA to treat advanced endometrial carcinoma. In addition, on July 17, the FDA approved MRK’s VAXNEUVANCE drug to prevent diseases caused by Streptococcus pneumonia. These approvals should boost MRK’s drug sales in the United States.

Also in July,  the European Commission gave MRK marketing authorization for its VERQUVO drug to treat symptomatic heart failure across Europe. This should help MRK commercialize its VERQUVO drug across the European Union.

An $11.54 billion consensus revenue estimate for the about-to-be-reported quarter (ended June 2021) indicates a 6.2% improvement year-over-year. Analysts expect MRK’s EPS to come in at $1.44 in its  fiscal second quarter, indicating a 5.1% rise from the prior year quarter. MRK has gained 11.8% since hitting its 52-week low of $68.44 on April 3 to close yesterday’s trading session at $76.53.

MRK has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a grade of B for Value, Stability, and Quality. Of the 221 stocks in the Medical – Pharmaceuticals industry, MRK is ranked #15.

Beyond what we’ve stated above, we have rated MRK for Sentiment, Momentum, and Growth. Get all MRK ratings here.

Click here to checkout our Healthcare Sector Report for 2021

CVS Health Corporation (CVS)

CVS is an integrated pharmaceutical company that is based in Woonsocket, R.I., and operates in three segments: Pharmacy Services, Retail/LTC, and Corporate. The company is renowned for its long-term Omnicare solutions for senior citizens, retail specialty pharmacy chains, and pharmacy benefit management services.

For its  fiscal first quarter, ended March 31, CVS’ revenues increased 3.5% year-over-year to $69.10 billion. Its operating income and net income increased 3.4% and 10.5%, respectively, from the same period last year to $3.58 billion and $2.22 billion. Its adjusted EPS came in at $2.04, up 6.8% from the prior-year quarter.

On July 14, CVS expanded its MinuteClinic inside its pharmacy stores to Nevada, effectively increasing its market presence to 49 states and Washington DC in the United States. Amid the rising popularity of telehealth services, MinuteClinic video services have been a major hit among people seeking virtual medical treatment. As a result, this diversified service offering is expected to boost CVS’ market presence and revenues significantly.

In June, CVS’ subsidiary Aetna expanded its Medicare-Medicaid Alignment Initiative (MMAI) demonstration health plan in Illinois. The statewide expansion of this service amid reinstatement of the Affordable Care Act should make it a big hit in the community.

The Street expects CVS’ revenues to increase 5.6% year-over-year to $70.42 billion in the current quarter, ending September 2021. The company’s EPS is expected to rise 12% from the same period last year to $1.86 in the current quarter. Furthermore, CVS has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. Shares of CVS have gained 29.6% over the past year and 21% year-to-date.

It’s no surprise that CVS has an overall B rating, which translates to Buy in our proprietary rating system. In addition, the stock has an A grade for Sentiment, and B for Value and Stability. It  is ranked #1 out of six stocks in the Medical – Drug Stores industry.

In addition to the grades we’ve highlighted, you can view CVS’ ratings for Growth, Momentum, and Quality here.

Click here to checkout our Healthcare Sector Report for 2021

Waste Connections, Inc. (WCN)

Based in Canada, WCN provides non-hazardous solid waste services collection, recycling, and disposal services. The company operates in the United States and Canada through five segments—Southern, Western, Eastern, Central, Canada, and Corporate. Its end-use markets consist of residential, industrial, commercial, municipal, and exploration and production (E&P) customers.

WCN’s revenues increased 3.2% year-over-year to $1.40 billion in its fiscal first quarter, ended March 31, 2021. Its EBT increased 16.9% from the same period last year to $200.60 million. Its net income stood at $160.31 million, up 12.2% from the prior-year quarter, while its  EPS increased 13% from its year-ago value to $0.61.

The company has set ambitious 15-year sustainability targets to reduce environmental pollution. WCN aims to increase offsets to emissions by at least 50% by 2035 and increase biogas recovery by at least 40% over this period. Furthermore,  the company plans to increase its resources recovery rate by at least 50% over the next one and a half decades. As ESG investing gains mainstream popularity, WCN’s sustainability commitments should make it an attractive investment bet with  this class of investors.

Analysts expect WCN’s revenues to come in at $1.49 billion in its fiscal second quarter (ended June 2021), indicating a 14.1% improvement year-over-year. A $0.77 consensus EPS estimate for the about-to-be-reported quarter indicates a 28.3% rise from the year-ago value. Also, WCN beat the Street’s EPS estimates in each of the trailing four quarters.

WCN has gained 27.9% since hitting its 52-week low of $97.02 on February 24 to close yesterday’s trading session at $124.12. The stock is currently trading 0.7% below its 52-week high of $124.95, which it hit on May 10.

WCN has an overall B rating, which equates to Buy in our POWR Ratings system. The stock has an A grade  for Stability, and a B for Quality, Growth, Momentum, and Sentiment. It is ranked #5 of 18 stocks in the Waste Disposal industry.

Get an additional WCN rating for Value here.

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MRK shares were trading at $77.48 per share on Friday afternoon, up $0.95 (+1.24%). Year-to-date, MRK has declined -3.63%, versus a 18.24% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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