After a strong first quarter, where the S&P 500 Index ($SPX) gained 10.2% to notch its best Q1 gain in five years, U.S. stocks have looked weak in April. The sell-off gained traction yesterday, after data showed that the consumer price index (CPI) expanded at an annual pace of 3.5% in March, while the monthly gain was 0.4%.
Both the annual and monthly rise was 10 basis points higher than what analysts were expecting. And that was not all; the minutes of the Fed’s March meeting showed that members want to see more signs of inflation coming down before they start cutting rates.
U.S Stocks Fall on Dwindling Rate Cut Hopes
“Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent,” said the minutes.
After the dual shock, markets toned down their rate cut expectations, with no easing expected before September. As stocks adjusted to the “higher for longer” scenario, the Dow Jones Industrial Average ($DOWI) lost over 400 points, while the 10-year Treasury yield rose above 4.5%.
With inflation worries resurfacing and uncertainty about the trajectory of rate cuts rising, Pfizer (PFE) and Apple (AAPL) could be two defensive stocks worth buying.
Pfizer Is the Ultimate Defensive Stock
When we're talking about defensive stocks, consumer staples and pharma names would possibly be the first thing that comes to mind. In the pharma space, Pfizer looks like a name worth considering, as its valuations look quite attractive after the recent underperformance.
Pfizer trades at a next 12 months (NTM) price-to-earnings (PE) multiple of 11.9x, which should provide some sort of floor to the stock. The cherry on the cake, of course, is the 6% dividend yield. Pfizer has reiterated its commitment to the dividend on more than one occasion, and apart from the likely capital appreciation, investors can expect the dividend bonanza to continue.
While sales of Pfizer’s COVID-19 portfolio have dropped drastically, the non-COVID portfolio is doing reasonably well. Pfizer expects Seagen (which it acquired last year) revenues to come in at $3.1 billion in 2024, and gradually rise to at least $10 billion by 2030. During the Q4 earnings call, Pfizer’s CEO Albert Bourla said that, along with growing its key product franchises, Pfizer is “exploring further opportunities to advance a number of innovative combination regimens.”
Amid slowing growth, Pfizer is working on cost cuts, and expects incremental net cost savings of $2 billion by the end of 2024.
Pfizer is looking to deleverage its balance sheet, which got bloated after the Seagen acquisition, and management intends to bring down the debt levels going forward. Overall, with PFE stock already trading near 52-week lows, there looks to be little downside from these levels, considering the already depressed valuations.
Apple Is a Defensive Tech Stock
While Apple is not your usual defensive stock, it would fit into the category of a “defensive tech stock.” The iPhone maker has proved its defensive credentials on more than one occasion, and tends to outperform during periods of market weakness.
The most recent example was in 2022, when it was the only “Magnificent 7” stock that fell less than the Nasdaq Composite ($NASX). The company’s business model has also been relatively immune from economic slowdown and dwindling smartphone sales. Data from IDC showed that iPhone shipments rose 3.7% last year, even as global smartphone volumes fell 3.2% to a decade low.
Like Pfizer, Apple stock has also underperformed its peers over the last year, and is not too far from its 52-week lows. However, the stock now has good valuation support at the current NTM PE of around 25x.
While Apple might not bring a good dividend yield to the table – tech companies are already hardly known for their yields – the company is a giant when it comes to stock buybacks. These repurchases will add value for shareholders, and especially when done at depressed price levels, as we currently have.
To be sure, there are valid concerns over Apple losing market share in China, rising U.S.-China tensions, and antitrust issues, including over Apple’s App Store policies. However, the headwinds look more than factored in at these prices, and Apple could surprise on the upside with its artificial intelligence (AI) endeavors.
The company has seemingly not participated in the “AI rally,” but has teased more announcements for AI initiatives later this year. Overall, while Apple might not be the typical defensive stock, its stable business, strong brand, and tepid valuations make it a name worth betting on as broader markets turn volatile.
On the date of publication, Mohit Oberoi had a position in: PFE , AAPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
