The U.S. stock market is undergoing a rotation as investors grapple with softening economic data and recalibrate their portfolios. Tariffs could send inflation higher again, as per UMich, and the Atlanta Fed expects negative GDP in the current quarter. Consumer and retail data also came in soft recently, and labor data came in soft a few weeks ago.
The stock market has seen a recovery on Friday, and a slower recovery on Saturday, but there’s still a lot of unease about where the market could head in the coming months. This turmoil is not without its opportunities, as defensive stocks could trade at much higher premiums.
These stocks were offloaded as investors chased growth stocks, but they could be key beneficiaries if investors keep de-risking their portfolios. It’s worth snapping up some cheap defensive stocks that are trading at floor prices. Plus, defensive stocks usually come with dividends, so they could be even more attractive if the Fed starts cutting again in June.
Dollar Tree (NASDAQ:DLTR) is a dollar store retail company. It focuses on lower-end retail markets and low-income customers. The company’s fate has been similar to that of Dollar General (NYSE:DG), where investors initially thought that higher inflation would force people to shop there. Instead, the disproportionate impact of inflation on lower-income customers has caused more distress.
DLTR stock is now down almost 49% in the past year. The company’s high debt load at $10.55 billion has also caused pain since the Fed has held interest rates higher for longer. In fact, the net loss is over $1 billion if you look at TTM earnings.
I believe it’s worth buying the dip as earnings have bounced back significantly on a sequential basis and are expected to keep climbing in the years ahead. It reported a 3.5% increase in Q3 net sales, and management is also looking into a spin-off for its underperforming Family Dollar segment.
Analysts expect EPS to grow from $5.4 in its fiscal period ending on January 2025 to over $12.4 by 2031. In the meantime, sales growth remains positive, and defensive investors could pile in as growth stocks falter.
Flowers Foods (NYSE:FLO) is a pretty small company, but I believe it is one of the best defensive stocks you can buy on the dip right now. The stock was on a consistent long-term trajectory before the latest decline, which was caused by bearishness surrounding the company’s debt-funded acquisition of Simple Mills and the subsequent credit rating downgrades.
Broader economic weaknesses have also caused sluggish growth, and investors are worried about higher egg prices eating into the bakery company’s margins. Regardless, it’s hard to see it go lower. The stock trades at just 16 times earnings and is down 37.5% from its late-2022 peak. it also comes with a 5.12% dividend yield, which is very safe.
Revenue is expected to rebound by 6.3% for the whole year. EPS is expected to decline by 8.8% this year, but growth is expected to pick back up in the next few years. The dividends are mostly why I’m bullish. If the Fed cuts rates and investors get more hungry for yield, FLO is going to be one of the premier picks.
PepsiCo (NASDAQ: PEP) is likely one of the first stocks you hear when someone talks about defensive stocks. That’s exactly why I think it could benefit in an evironment where investors start rotating their gains from riskeir assets into defensive stocks.
The stock is down 23.7% from its May 2023 peak and is down 12.6% in the past year. It is almost unch year-to-date, but could soon start recovering if Wall Street’s risk-aversion persists. Revenue declined by 0.24% in Q4 and missed estimates by 0.39%. However, margins remain strong and this is a company that has a 3.61% dividend yield with 53 years of consecutive dividend increases. It’s hard to ignore below $150.
It trades at 21 times trailing earnings, but investors have historically paid over 26 times earnings due to the stability of the company’s financials. Growth has slowed down, but that’s not what investors look at when rotating into defensive stocks.
The median price target is at $164, but a further de-risking could push PEP to the higher price target of $185.
