Defensive Stocks For A Volatile Market

  • Intuitive Surgical’s stock remains relatively resilient despite the current market volatility.
  • NRG energy continues to benefit from improving prices, greater grid efficiency, and the Inflation Reduction Act.
  •  Defensive stocks are useful in overcoming the current volatile environment.

Market volatility is back in the headlines after the Federal Reserve continued to hike interest rates during its latest meeting. The Dow Jones fell below 30,000, joining the S&P 500 in bear market territory. Since inflation continues to run hot and employment figures continue to remain at low levels, it’s almost certain that the next two Fed meetings will produce interest rate hikes of 75 bps, which will continue to push pressure on liquidity, and therefore, financial assets. Investors can increasingly look to defensive stocks, with long-term sustainable competitive advantages and consistent cash flows for their portfolio, if they are looking to allocate capital during times of volatility.



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Consider the following two stocks

Intuitive Surgical (NASDAQ: ISRG) is an American medical robotics company that designs and manufactures robotic products to improve clinical outcomes, and its most successful product remains the Da Vinci system, which is increasingly finding its way into surgical theatres. Medical equipment stocks are well placed to grow over the next eight years, and the medical robotics market is expected to grow steadily over the same period at 16% per annum, at which point it could generate $44 billion in revenue. Despite the broader market sell-off the stock continues to remain buoyant and is currently down 15% compared to the broader market which is down over 20% on average.

The medical industry on average has better long-term economics. Especially as the average global age increases, more people require medical care. Furthermore, the global healthcare industry is increasingly investing in technology to improve medical outcomes globally, which only improves the fortunes of companies such as Intuitive Surgical. Global growth should help sustain momentum, especially as China, Japan, and Asia, remain at forefront of demand, with growing economies, and increasing levels of investment helping them move away from traditional surgical tools to modern-day devices.

ISRG has seen its sales increase by 16% for the past five years and earnings-per-share increase by 17%. In terms of valuation, the company remains pricey with a P/E of 48x, and a forward P/E of 33x. And while investors might consider these valuations slightly expensive,  the consistency of growth and revenue means the market will continue to attach a premium to the stock. One of the positives for the stock is that it has little to no debt, which means that it is unlikely to face any real issues during the current rising interest rate cycle. Consider the stock if you’re looking for a long-term investment, with a business that produces consistent results and stable cash flow.

NRG Energy (NYSE: NRG) is a utility company in the unregulated energy space. Its business revolves around an integrated power company operating through Texas, East, and West, United States. The company is involved in producing, selling, and delivering electricity and related products and services to approximately 6 million residential, commercial, industrial, and wholesale customers. It generates electricity using natural gas, coal, oil, solar, nuclear, and battery storage

NRG Energy has been increasingly investing in its smart grid to give its users more control over their power usage. But despite its best efforts, prices in the energy sector are on the rise, especially in the residential energy market. NRG energy remains central to the areas it provides power, which means the earnings should be consistent and less volatile than other sectors. Results have continued to come in strong through the first few quarters, and states such as Texas where it operates large parts of its business had an unusually hot summer, which in turn should help drive earnings further over the next couple of quarters.

The company’s valuation remains relatively steady with forward price-to-earnings at 9x, and with the rate at which energy prices are increasing could result in the stock price increasing over the next few quarters. The company also pays a dividend of 3.55% and has relatively manageable debt, with debt to equity at 1.5. NRG Energy is also set to benefit from the latest bills passed in Congress, specifically the Inflation Reduction Act, which will provide it funding for carbon reduction projects. Overall, the utility industry continues to remain firm despite the uncertain macroeconomic environment, making it suitable for those looking to overcome volatility.