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Defensive Sectors Breakout: 3 Stocks to Buy Now for Protection
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Over the past month we have observed some very interesting activity across the market’s more defensive sectors, considerable outperformance. Below we can see just how significantly the Utilities ((XLU - Free Report) ), Healthcare ((XLV - Free Report) ), Energy ((XLE - Free Report) ) and Real Estate ((XLRE - Free Report) ) sector ETF have outperformed the S&P 500 (in orange).
The difference in performance is even more stark when compared to the Semiconductor ((SOXX - Free Report) ) and Technology ((QQQ - Free Report) ) ETFs, which have been the market darlings all year.
So, what is going on here and how can we as investors profit from it? Here, I will explain the cause of this rotation, and share three stocks picks that boast tailwinds heading into the shift. The stocks include Regeneron Pharmaceutical ((REGN - Free Report) ), Public Service Enterprise Group ((PEG - Free Report) ) and Avalon Bay Communities ((AVB - Free Report) ).
Image Source: TradingView
Why Tech is Selling Off and Defensive Stocks are Rallying?
The rotation began in early July, as we saw the Small Cap Index Russell 2000 explode higher, right as technology began to sell off. And now the small caps are selling off too, while the defensive sectors bid up to their recent highs.
The first cause of rotation out of tech and into small caps was the market shift in expectations of the Federal Reserve’s rate cut policy. As inflation continues to ease and the labor market remains steady, it seems the central bank has pulled off a soft landing.
This gave investors the green light to start buying stocks that have been struggling due to higher debt expenses from higher interest rates. Many investors had been hiding out in mega cap tech stocks because they were performing so well regardless of the interest rate regime. But now the environment is shifting which is why we saw investors rotate into both small caps, and defensive stocks.
The rally in defensive stocks has received less airtime, because they are generally more boring slow growth stock. But today, we are seeing the Russell 2000 sell off hard while defensive names are holding up. As investors anticipate lower interest rates, investors are buying stocks with a yield, like healthcare, utilities and REITs.
I think the defensive stance is bolstered by investor caution heading into the presidential election and expect this theme to hold true until after the election concludes. Market leaders like tech and semiconductors will take a rest, as they have crushed it this year and defensive stocks should outperform.
Avalon Bay Communities: Market Leading REIT
Avalon Bay Communities is a real estate investment trust (REIT) that focuses on the development, acquisition, and management of multifamily communities in high barrier-to-entry markets of the US. The company owns or holds an interest in numerous apartment communities, in the Atlantic Northeast, Pacific Northwest and in California. AvalonBay's properties cater to a wide range of renters, from luxury apartments to more affordable housing options, making it one of the largest publicly traded apartment REITs in the U.S.
Avalon Bay stands out to me for several reasons; its stock is showing considerable relative strength among its peers and broader market, it enjoys a top Zacks Rank, a historically discounted valuation and a tidy dividend yield.
AVB stock has been an industry outperformer this year, and just today broke out to new YTD highs. As market expectations for interest rates fall, the value of real estate will rise, and investors want exposure to that appreciation. With its massive residential real estate portfolio, Avalon Bay Communities is a logical beneficiary.
The company has also experienced some revisions higher to its earnings estimates, giving it a Zacks Rank #2 (Buy) rating. Additionally, it is trading at a one year forward earnings multiple of 18.7x, which is below its 20-year median of 21.4x.
Finally, Avalon Bay pays a tidy 3.3% dividend yield. The dividend payment has grown by an average of 5.4% annually over the last 12 years.
Regeneron Pharmaceuticals is a leading biotechnology company that discovers, develops, and commercializes innovative medicines aimed at treating serious diseases. Founded in 1988 and headquartered in Tarrytown, New York, Regeneron is known for its strong research and development capabilities, particularly in the field of monoclonal antibodies. The company's portfolio includes treatments for a range of conditions, such as eye diseases, cancer, cardiovascular diseases, allergic and inflammatory diseases, and infectious diseases.
Regeneron Pharmaceuticals stock has put up an incredible long-term performance. Over the last 20 years the stock has compounded at an annual rate of 26.8%, more than 120xing investors’ money.
Additionally, like the other stocks shared here, REGN stock is showing notable relative strength, holding up very well during the recent selloff. Today, Regeneron posted another strong quarter of performance, beating earnings estimates by 8.9%. The stock now sits just below its YTD high.
At the quarterly earnings meeting, management noted the incredible dominance and strength of its primary drugs Eylea, which the number one prescribed treatment for retinal disease and Dupixent, which saw $3.6 billion in net sales for Q2. They also shared that they would be investing another $5 billion into research and development as well as another $3 billion share repurchase program, which follows over $12 billion of buybacks since 2019.
Image Source: Zacks Investment Research
Public Service Enterprise Group: Top Ranked Utility Stock
Public Service Enterprise Group is a diversified energy company headquartered in Newark, New Jersey. Established in 1903, PSEG is one of the largest electric and gas utilities in the US. The company primarily operates through two main subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Power. PSE&G provides electric and gas service to millions of customers in New Jersey, while PSEG Power operates a diverse fleet of power plants that generate electricity.
Again, like the others, PEG stock is showing relative strength against the broad market and its respective sector. The stock just made new YTD highs yesterday after breaking out from a three-month consolidation.
Image Source: TradingView
Public Service Enterprise Group also boasts a Zacks Rank #2 (Buy) rating, reflecting upward trending earnings revisions. Q2 earnings estimates have increased by 12% in the last two months.
Also notable is PEG’s commitment to returning cash to shareholders. The company currently pays a 3% dividend yield and has raised the payment consistently over the past twenty years.
Image Source: Zacks Investment Research
How to Keep it Simple with ETFs
As investors shift to more defensive stocks, ETFs also provide a convenient way to gain broad exposure. If picking individual stocks from each of the defensive sectors seems too concentrated for you, definitely consider picking up some of the sector ETFs shared here instead. They offer a diversified way of gaining that exposure.
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Defensive Sectors Breakout: 3 Stocks to Buy Now for Protection
Over the past month we have observed some very interesting activity across the market’s more defensive sectors, considerable outperformance. Below we can see just how significantly the Utilities ((XLU - Free Report) ), Healthcare ((XLV - Free Report) ), Energy ((XLE - Free Report) ) and Real Estate ((XLRE - Free Report) ) sector ETF have outperformed the S&P 500 (in orange).
The difference in performance is even more stark when compared to the Semiconductor ((SOXX - Free Report) ) and Technology ((QQQ - Free Report) ) ETFs, which have been the market darlings all year.
So, what is going on here and how can we as investors profit from it? Here, I will explain the cause of this rotation, and share three stocks picks that boast tailwinds heading into the shift. The stocks include Regeneron Pharmaceutical ((REGN - Free Report) ), Public Service Enterprise Group ((PEG - Free Report) ) and Avalon Bay Communities ((AVB - Free Report) ).
Image Source: TradingView
Why Tech is Selling Off and Defensive Stocks are Rallying?
The rotation began in early July, as we saw the Small Cap Index Russell 2000 explode higher, right as technology began to sell off. And now the small caps are selling off too, while the defensive sectors bid up to their recent highs.
The first cause of rotation out of tech and into small caps was the market shift in expectations of the Federal Reserve’s rate cut policy. As inflation continues to ease and the labor market remains steady, it seems the central bank has pulled off a soft landing.
This gave investors the green light to start buying stocks that have been struggling due to higher debt expenses from higher interest rates. Many investors had been hiding out in mega cap tech stocks because they were performing so well regardless of the interest rate regime. But now the environment is shifting which is why we saw investors rotate into both small caps, and defensive stocks.
The rally in defensive stocks has received less airtime, because they are generally more boring slow growth stock. But today, we are seeing the Russell 2000 sell off hard while defensive names are holding up. As investors anticipate lower interest rates, investors are buying stocks with a yield, like healthcare, utilities and REITs.
I think the defensive stance is bolstered by investor caution heading into the presidential election and expect this theme to hold true until after the election concludes. Market leaders like tech and semiconductors will take a rest, as they have crushed it this year and defensive stocks should outperform.
Avalon Bay Communities: Market Leading REIT
Avalon Bay Communities is a real estate investment trust (REIT) that focuses on the development, acquisition, and management of multifamily communities in high barrier-to-entry markets of the US. The company owns or holds an interest in numerous apartment communities, in the Atlantic Northeast, Pacific Northwest and in California. AvalonBay's properties cater to a wide range of renters, from luxury apartments to more affordable housing options, making it one of the largest publicly traded apartment REITs in the U.S.
Avalon Bay stands out to me for several reasons; its stock is showing considerable relative strength among its peers and broader market, it enjoys a top Zacks Rank, a historically discounted valuation and a tidy dividend yield.
AVB stock has been an industry outperformer this year, and just today broke out to new YTD highs. As market expectations for interest rates fall, the value of real estate will rise, and investors want exposure to that appreciation. With its massive residential real estate portfolio, Avalon Bay Communities is a logical beneficiary.
The company has also experienced some revisions higher to its earnings estimates, giving it a Zacks Rank #2 (Buy) rating. Additionally, it is trading at a one year forward earnings multiple of 18.7x, which is below its 20-year median of 21.4x.
Finally, Avalon Bay pays a tidy 3.3% dividend yield. The dividend payment has grown by an average of 5.4% annually over the last 12 years.
Image Source: TradingView
Regeneron Pharmaceutical: Healthcare Compounder Stock
Regeneron Pharmaceuticals is a leading biotechnology company that discovers, develops, and commercializes innovative medicines aimed at treating serious diseases. Founded in 1988 and headquartered in Tarrytown, New York, Regeneron is known for its strong research and development capabilities, particularly in the field of monoclonal antibodies. The company's portfolio includes treatments for a range of conditions, such as eye diseases, cancer, cardiovascular diseases, allergic and inflammatory diseases, and infectious diseases.
Regeneron Pharmaceuticals stock has put up an incredible long-term performance. Over the last 20 years the stock has compounded at an annual rate of 26.8%, more than 120xing investors’ money.
Additionally, like the other stocks shared here, REGN stock is showing notable relative strength, holding up very well during the recent selloff. Today, Regeneron posted another strong quarter of performance, beating earnings estimates by 8.9%. The stock now sits just below its YTD high.
At the quarterly earnings meeting, management noted the incredible dominance and strength of its primary drugs Eylea, which the number one prescribed treatment for retinal disease and Dupixent, which saw $3.6 billion in net sales for Q2. They also shared that they would be investing another $5 billion into research and development as well as another $3 billion share repurchase program, which follows over $12 billion of buybacks since 2019.
Image Source: Zacks Investment Research
Public Service Enterprise Group: Top Ranked Utility Stock
Public Service Enterprise Group is a diversified energy company headquartered in Newark, New Jersey. Established in 1903, PSEG is one of the largest electric and gas utilities in the US. The company primarily operates through two main subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Power. PSE&G provides electric and gas service to millions of customers in New Jersey, while PSEG Power operates a diverse fleet of power plants that generate electricity.
Again, like the others, PEG stock is showing relative strength against the broad market and its respective sector. The stock just made new YTD highs yesterday after breaking out from a three-month consolidation.
Image Source: TradingView
Public Service Enterprise Group also boasts a Zacks Rank #2 (Buy) rating, reflecting upward trending earnings revisions. Q2 earnings estimates have increased by 12% in the last two months.
Also notable is PEG’s commitment to returning cash to shareholders. The company currently pays a 3% dividend yield and has raised the payment consistently over the past twenty years.
Image Source: Zacks Investment Research
How to Keep it Simple with ETFs
As investors shift to more defensive stocks, ETFs also provide a convenient way to gain broad exposure. If picking individual stocks from each of the defensive sectors seems too concentrated for you, definitely consider picking up some of the sector ETFs shared here instead. They offer a diversified way of gaining that exposure.