The sell-off in U.S. stocks that began in August has intensified in October. In Tuesday's session, the Dow Jones Industrial Average ($DOWI) fell more than 400 points to turn negative for the year. The S&P 500 Index ($SPX) and Nasdaq Composite ($NASX) also fell amid yesterday's heavy selling - but despite having fallen for two consecutive months, both of these indices are still in the green for 2023, thanks to a stellar first-half rally.
Just as September is widely known as the worst month for equities, October has a reputation as the most volatile month for the stock markets – a title it has held onto so far in 2023. Meanwhile, investors are getting jittery about markets now amid rising bond yields, with the 10-year yield rising to a 16-year high of 4.8%, and many now predicting it will hit 5% in the short term.
Growth Stocks Punished by U.S. Stock Market Sell-Off
Rising bond yields have especially spelled doom for growth stocks as most of their earnings are skewed towards the future - and these earnings become less valuable in current dollar terms when discounted at a higher rate.
The sell-off in growth stocks is perhaps best captured by the fall in the ARK Innovation ETF (ARKK) – the flagship fund of Cathie Wood, who is the epitome of growth investing just as Warren Buffett is for value investing. ARKK is down more than 26% from its 2023 intraday high of $51.33, set on July 19, which is much worse than the fall in broader market indices over the period.
The current sell-off can be troubling for some investors – especially conservative investors. While stocks turned positive today after a tame jobs report, they're hardly in rally mode - and I believe the sell-off might stretch for a few more trading days before the baton passes to corporate earnings later this month.
Defensive Stocks to Buy Now
Many investors seek solace in defensive stocks, as their earnings trajectory is quite linear and their topline and bottom-line performance is usually not overly dependent on the macro environment. Generally, defensive stocks have a healthy dividend yield, which adds another layer of certainty to their return profile. I believe Pfizer (PFE), Coca-Cola (KO), and Berkshire Hathaway (BRK.B) are three defensive stocks worth buying amid the current market turmoil.
Pfizer Looks Like a Good Defensive Stock to Buy
Pfizer stock is trading near its 52-week lows, and has been underperforming the markets for quite some time now, as the demand for its COVID-19 vaccines has faded.
To make things more complicated, Pfizer - along with some of the other pharma majors - is staring down a “patent cliff” – which means that the company’s patents over several medicines will soon expire, putting its revenues and profits at risk. As is the case in the pharma industry, Pfizer is trying to spur growth through the inorganic way, and has announced the acquisition of Seagen to help it boost its cancer portfolio.
Pfizer stock trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 11.8x, while its dividend yield is almost 5%. I believe the stock is among the best defensive plays to buy now amid the broader market sell-off, given its tepid valuations and the growth opportunities from its pipeline of new products.
Coca-Cola is Another Defensive Play
Coca-Cola could perhaps find a place in most defensive portfolios – including that of Berkshire Hathaway, which has held the stock for years. The demand for Coca-Cola’s products is not much impacted during an economic slowdown, just as it does not spike too much during periods of economic boom.
The company has a strong brand, which gives it pricing power - as best evidenced over the last couple of years, amid sharply rising inflation.
Coca-Cola stock looks reasonably valued and trades at an NTM PE multiple of 20.4x, which is a discount to its 3-year average, as well as that of rival PepsiCo (PEP). Given its stable business model, progressive dividend policy, and reasonable valuations, I believe Coca-Cola looks like a defensive stock worth owning, especially for conservative investors.
Stock Market Crash Could Help Buffett Deploy Berkshire Hathaway's Cash
Berkshire Hathaway is a conglomerate, and holds multiple businesses ranging from industrials, energy, aviation, railroads, and insurance under its fold. It also has a burgeoning portfolio of publicly traded companies, where Apple (AAPL) is the leading holding.
I believe that Berkshire is among the least understood and sparsely followed companies among the analyst community, even as it is among the top 10 companies in the U.S. The stock is a strong defensive bet considering the investment philosophy of chair Warren Buffett.
Buffett was a net seller of stocks in the first half of 2023 while also being quite frugal with buybacks; the conglomerate only repurchased $1.4 billion worth of its shares in Q2. As a result, Berkshire Hathaway’s cash pile rose to $147.2 billion at the end of June - the second-highest level on record.
The ongoing sell-off in U.S. stocks should help Buffett deploy some of Berkshire’s cash by buying stocks at lower levels. He might even scale up the repurchases, as Berkshire Hathaway shares are also down over 8% from their 2023 highs.
Simply put, the fall in stock markets is not all that bad for Berkshire Hathaway, as it will help Buffett deploy the company's cash hoard much more efficiently - which will help drive the stock’s long-term returns.
In terms of valuation, the stock trades at a NTM enterprise value-to-earnings before interest tax, depreciation, and amortization multiple of 13.5x, which looks reasonable. I believe Berkshire Hathaway is among the stocks that defensive investors can hold over the long term, given the conglomerate's value investing philosophy and a portfolio of well-managed subsidiaries.
On the date of publication, Mohit Oberoi had a position in: ARKK , BRK.B , AAPL , PFE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
