If you think economic weakness and sliding earnings will make the stock market resume its 2022 decline this year, defensive stocks may be for you.
These are companies that don’t get hurt by economic cycles, because their products are needed whether the economy is strong or weak.
The Morningstar US Defensive Super Sector Index measures the performance of stocks from historically defensive sectors such as utilities, consumer defensive, and healthcare. The Index slipped only 3.6% last year, compared to a 19.4% slide for the Morningstar US Market Index.
Morningstar put together a list of the most undervalued stocks in its Defensive Index that carry a wide moat (durable competitive advantage). Valuations are determined relative to Morningstar analysts’ fair value estimates.
Here’s the roster, starting with the most undervalued stock as of Jan. 2.
- Veeva Systems (VEEV), a life-sciences software company
- Medtronic (MDT), a medical device company
- Zimmer Biomet (ZBH), another medical device company
- Dominion Energy (D), a utility
- West Pharmaceutical Services (WST), a medical supplies company
- Zoetis (ZTS), a seller of health products for animals
- Constellation Brands (STZ), a beer company
- Clorox (CLX), the home cleaning products company
- Kellogg (K), the cereal company
- Altria Group (MO), a tobacco company
- Estee Lauder (EL), the beauty products company
Veeva: Morningstar analyst Keonhee Kim puts fair value for the stock at $265. It recently traded at $164.
“Veeva is the leading provider of cloud-based software solutions tailored to the life sciences industry,” he wrote in a commentary. “It provides an ecosystem of products to address the operating challenges and regulatory requirements that companies in the space face.”
To its advantage, “instead of focusing on a general, one-size-fits-all system, Veeva has created platforms that are purely designed to serve one industry,” Kim said. “This vertical focus has allowed the company to shape its products for its specific customers to fit their specific needs.”
Medtronic: Morningstar analyst Debbie Wang puts fair value for the stock at $112. It recently traded $80.
“Medtronic's standing as the largest pure-play medical-device maker remains a force to be reckoned with in the medical-technology landscape,” she wrote in a commentary.
“Pairing Medtronic's diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic's position as a key partner for its hospital customers. Medtronic has historically focused on innovation.”
Zimmer Biomet: Wang puts fair value for the stock at $175. It recently traded at $123.
“Zimmer is the undisputed king of large joint reconstruction, by far,” she wrote in a commentary. “We expect favorable demographics, which include aging baby boomers and rising obesity, to fuel solid demand for large-joint replacement that should offset price declines.”
Zimmer has “focused on cultivating close relationships with orthopedic surgeons who make the brand choice,” Wang said.
“High switching costs and high-touch service keep the surgeons closely tied to their primary vendor. And the surgeons bring in enough profitable procedures to keep hospital administrators at bay.”
The author of this story owns shares of Medtronic and Clorox.
