Morgan Stanley has been busy recently. A team of over 30 analysts has just put together a list of the best defensive sectors, based on almost 25 years of market data. These are the sectors that have outperformed even when growth slows. And the best part: the firm has also selected its top stock pick in each of these sectors.
“We think a rotation to more defensive market leadership is coming later this year and into 2019” Morgan Stanley analysts wrote. “Before that rotation begins in earnest, we test traditional notions of defensiveness and assess if what was defensive in the past will continue to be so in the future.”
Here we delve into four sector stock picks highlighted by the firm. These are stocks that can still deliver even in times of volatility or slowing returns. We also use TipRanks to delve down into why these four stocks also have the backing of the Street in general. Let’s take a closer look now:
Integrated oil and gas: Chevron Corp (NYSE:CVX)
“Beyond a bullish outlook on oil, we see additional support from a new ‘Golden Age’ for Refining as underinvestment in refining, slippages in capacity adds and overdone concerns on long-term demand set the stage for the refining upcycle to inflect into a golden age until 2020.”
The firm lists oil giant Chevron as a top pick. And this bullish take is mirrored by the Street. As the graph below shows, CVX has a ‘Strong Buy’ analyst consensus rating. The stock has received 6 back-to-back Buy ratings from top analysts in the last three months. Meanwhile the $146.67 price target indicates 23% upside potential from current levels.
“Chevron is executing well and we remain constructive on the company’s long-term, shareholder-friendly plan,” cheers Barclays’ Paul Cheng. He boosted his price target on Chevron to $145 back in July (24% upside potential).
Utilities: FirstEnergy (NYSE:FE)
“At a high level, US utilities contain one of the lowest risk among all industries because these companies are permitted to earn a certain rate of return on capital deployed, and operate under exclusive mandates that are perpetual in nature,” the firm said.
“There is a surprisingly large differential in EPS growth potential, and business risk, among US utilities. Currently, we favor several high-growth electric utilities that are benefiting from increasingly cheap renewable energy.”
In this respect, a top pick for the firm is electric utility stock FirstEnergy. This ‘Strong Buy’ stock has received three recent Buy ratings from the Street. Interestingly it is the best-performing analyst covering the stock (Guggenheim’s Shahriar Pourreza) that has the highest price target ($43- 14% upside potential).
Healthcare equipment: Boston Scientific Corp (NYSE:BSX)
The healthcare supply industry is a prime pick for defensive investing says Morgan Stanley. This is because: 1) equipment stocks are less susceptible to risks such as lower drug prices 2) greater innovation in the space should promote growth, as should 3) growth in emerging markets. The firm recommends medical device maker Boston Scientific Corp.
Top Needham analyst Michael Matson (Profile & Recommendations) highlights BSX as a top med tech pick. “We reiterate our Strong Buy rating given BSX’s strong product cycle, our expectation that [the] Lotus [heart valve] accelerates growth in 2019, and potential for additional upside to estimates” comments Matson. He notes that the US and EU Lotus launches are still expected in 2019, and sees prices reaching $39. Plus BSX has just announced that it is acquiring the remaining 75% of VENITI it does not already own for $108M.
As we can see here, in the last three months, this ‘Strong Buy’ stock has received unanimous top-analyst support:
Defensive: Lockheed Martin (NYSE:LMT)
Defensive stocks generate revenue from the government even when the rest of the market is faltering, explains Morgan Stanley. Indeed, in August, President Trump signed the 2019 National Defense Authorization Act which authorizes a top-line budget of $717 billion.
“Net-net, we forecast a 10-15% total return annually for Defense Primes, consisting of 10%+ annual growth and a 1-2% dividend yield through decade-end” says the firm.
They single out global security and aerospace company Lockheed Martin- which has a cautiously optimistic ‘Moderate Buy’ rating from the Street.
Top Alembic Global analyst Pete Skibitski (Profile & Recommendations) comes down firmly in the stock’s favor. He has just initiated coverage on LMT with a very bullish $408 price target (27% upside potential). Most crucially: “LMT looks to be taking a lead role in garnering wins on new, ‘3rd offset’ projects within DoD, such as hypersonics… The firm was also recently awarded a nearly USD3B order for next-gen space surveillance satellites. We believe these types of wins will help LMT drive above-peer growth of >6% in 2019 and 2020, with opportunity for upside.”
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