10 Best Defensive Stocks to Buy According to Ray Dalio

Published on September 21, 2022 at 2:13 pm by Omer Farooq in Hedge Funds, News

In this article, we will look at the 10 best defensive stocks to buy according to Ray Dalio. If you want to explore similar stocks, you can also take a look at 5 Best Defensive Stocks to Buy According to Ray Dalio.

Ray Dalio is a billionaire investor and hedge fund manager of Bridgewater Associates, one of the world’s largest hedge funds. Mr. Dalio founded Bridgewater Associates in 1975 and has since grown it into a billion-dollar hedge fund. The fund has roughly $140 billion in assets under management. As of June 30, Mr. Dalio manages more than $23.5 billion in 13F securities through his hedge fund. Forbes estimates Mr. Dalio’s real-time net worth sits at $19.1 billion as of September 21, 2022.

“It Starts With Inflation”

Mr. Dalio is a credible figure in the finance industry and is renowned for his analyses of the markets. Mr. Dalio is a notable columnist and author. On September 14, Ray Dalio published an article titled “It Starts With Inflation”, in which the stock market veteran explained how inflation and interest rates are related to the stock market and the overall economy.

According to Mr. Dalio, inflation occurs when living standards rise and the economy expands. However, too much inflation creates “undesirable effects” and causes central banks to raise interest rates and slow down the economy, bringing the inflation rate down to their target. When central banks tighten to curtail inflation and make borrowing money expensive, it causes equity prices to tank and the economy to slow down.

Ray Dalio’s ‘Guesstimates’

While analysts and market experts view the long-term inflation rate to be 2.6%, Ray Dalio estimates that in the long-term inflation in the United States is expected to be between 4.5% and 5% due to “barring shocks” and geopolitical turmoil. According to Mr. Dalio, long-term and short-term interest rates are expected to fall between 4.5% and 6%. Mr. Dalio sees U.S. interest rates pointing to the “higher end” of his 4.5% and 6% range if the Fed is to restore price stability and the supply-demand imbalance. Finally, Mr. Dalio calculated that if the Fed raises its target range for the federal fund’s rate to 4.5% from 2.5% then it would cause equities to fall by 20%.

Bridgewater Associates’ Stock Portfolio

In the second quarter of 2022, Bridgewater Associates increased its position in 116 companies, reduced its exposure to 256 companies, discarded 99 of its positions, and added 116 new positions to its portfolio. The fund has a top ten holdings concentration of 29.4% and has investments concentrated in the consumer staples, healthcare, and financial services sectors. Over the past 8 quarters, from Q2 2020 to Q2 2022, Bridgewater Associates has generated an average quarter-on-quarter return of 2.55%.

The Fed is expected to maintain its hawkish attitude until it brings down inflation to 2%. As interest rates rise, investors are pulling away from high-growth stocks that tend to underperform in a slowdown and are focusing on defensive plays that can recession-proof their portfolios and sustain their performance. Some of the best defensive stocks that are part of Ray Dalio’s 13F portfolio include The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Johnson & Johnson (NYSE:JNJ). These stocks among others are discussed below.

Our Methodology

To determine the 10 best defensive stocks to buy according to Ray Dalio, we reviewed Bridgewater Associates’ 13F filings at the close of the second quarter of 2022. We narrowed down our selection to companies operating in consumer defensive sectors such as healthcare and consumer staples. We ranked these stocks in increasing order of Bridgewater Associates’ stake in them.

Best Defensive Stocks to Buy According to Ray Dalio

10. Starbucks Corporation (NASDAQ:SBUX)

Bridgewater Associates’ Stake Value: $247,711,000

Percentage of Bridgewater Associates’ 13F Portfolio: 1.04%

Number of Hedge Fund Holders: 55

Wall Street analysts see upside to Starbucks Corporation (NASDAQ:SBUX). On September 15, Deutsche Bank analyst Brian Mullan raised his price target on Starbucks Corporation (NASDAQ:SBUX) to $101 from $93 and reiterated a Buy rating on the shares. This September, Morgan Stanley analyst John Glass raised his price target on Starbucks Corporation (NASDAQ:SBUX) to $96 from $88 and maintained an Equal Weight rating on the shares.

On September 15 Richard Allison, one of the directors of Starbucks Corporation (NASDAQ:SBUX), disclosed that he has acquired 10,000 shares of the company’s common stock at roughly $92.5 per share. On the same day another director, Mellody Hobson, filed for acquiring 54,750 Starbucks (NASDAQ:SBUX) shares at roughly $92.5 per share.

As of September 21, Starbucks Corporation (NASDAQ:SBUX) has gained 4.5% over the past six months and is offering a forward dividend yield of 2.16%, which the company backs with free cash flows of $3 billion.

At the close of Q2 2022, 55 hedge funds were long Starbucks Corporation (NASDAQ:SBUX). The total stakes of these hedge funds amounted to $1.43 billion. As of June 30, Bridgewater Associates owns 3.2 million shares of the company, which amounts to a stake of $247.7 million.

Here is what Wedgewood Partners had to say about Starbucks Corporation (NASDAQ:SBUX) in its second-quarter 2022 investor letter:

“We exited our position in Starbucks during the second quarter. We do not mind admitting that there was a heated internal debate over this position, as there were several conflicting issues to weigh in our decision. Before the pandemic, we had been quite happy with the Company’s execution and the stock’s performance, and we were likewise happy with strategic decisions made during and immediately after the initial pandemic-related lockdowns in 2020, as we have written previously.

Despite our appreciation for the Company’s execution during this period, it was dealing with some concerning issues. First, as a business reliant upon stores being open, the Company faced continuing risks from rolling pandemic-related lockdowns, particularly in China, which is the Company’s second largest and fastest-growing market. A second and related issue was employee illness; even as stores were open, various pandemic waves (Omicron, for example) caused many employees to miss shifts, making it very difficult and expensive for Starbucks to keep its stores staffed properly.

The Company’s stock, like most of the U.S. stock market, enjoyed a healthy recovery from the pandemic beginning near the end of 2020 and into 2021; at times, we believed that recoveries in many portions of the stock market happened well ahead of recoveries in fundamentals, or that individual stocks often didn’t reflect still existing pandemic-related risks. Starbucks fit into this category for us at one point, and we would remind our investors that we earlier reduced our position in the stock for exactly that reason…” (Click here to see the full text)

9. CVS Health Corporation (NYSE:CVS)

Bridgewater Associates’ Stake Value: $291,530,000

Percentage of Bridgewater Associates’ 13F Portfolio: 1.23%

Number of Hedge Fund Holders: 65

CVS Health Corporation (NYSE:CVS) is a leading provider of health care services in the United States. Insider Monkey found 65 hedge funds long CVS Health Corporation (NYSE:CVS) at the close of Q2 2022. The total stakes of these hedge funds amounted to $2.03 billion, up from $1.56 billion a quarter ago with 72 positions.

On August 3, CVS Health Corporation (NYSE:CVS) announced earnings for the second quarter of fiscal 2022. The company reported earnings per share of $2.40 and outperformed estimates by $0.22. The company generated a revenue of $80.6 billion, up 11% year over year, and beat expectations by $4.26 billion.

CVS Health Corporation is rising and is also offering a strong dividend payout. Shares of CVS Health Corporation (NYSE:CVS) have appreciated by 20.7% over the past twelve months, as of September 21, and the company is offering a forward dividend yield of 2.17% which it supports with free cash flows of $15.8 billion.

On September 7, Evercore ISI analyst Elizabeth Anderson raised her price target on CVS Health Corporation (NYSE:CVS) to $125 from $120 and reiterated a buy-side Outperform rating on the shares.

As of June 30, Bridgewater Associates’ stake in CVS Health Corporation (NYSE:CVS) sits at $291.5 million. The investment covers 1.23% of Ray Dalio’s 13F portfolio.

In the second quarter of 2022, Ray Dalio piled into defensive stocks like CVS Health Corporation (NYSE:CVS) to recession-proof his hedge fund’s portfolio. Bridgewater Associates’ top five 13F holdings include ultimate defensive plays such as The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Johnson & Johnson (NYSE:JNJ).

8. Abbott Laboratories (NYSE:ABT)

Bridgewater Associates’ Stake Value: $304,211,000

Percentage of Bridgewater Associates’ 13F Portfolio: 1.28%

Number of Hedge Fund Holders: 61

Abbot Laboratories (NYSE:ABT) operates as a medical devices company in the healthcare industry. As of June 30, Bridgewater Associates’ stakes in Abbot Laboratories (NYSE:ABT) are valued at $304.2 million. The investment covers 1.28% of Ray Dalio’s 13F portfolio.

On July 20, Abbot Laboratories (NYSE:ABT) announced market-beating earnings for the second quarter of fiscal 2022. The company generated a revenue of $11.26 billion, up 10.1% year over year, and beat expectations by $856.5 million. The company reported earnings per share of $1.43 and outperformed consensus by $0.29. Abbot Laboratories (NYSE:ABT) also raised its fiscal 2022 EPS guidance and announced that it now sees adjusted EPS for fiscal 2022 to amount to at least $4.90, up from $4.70, and above Wall Street consensus of $4.88.

Shortly after the company’s earnings release, Citi analyst Joanne Wuensch revised her price target on Abbott Laboratories (NYSE:ABT) to $123 from $125 and reiterated a Buy rating on the shares.

At the end of the second quarter of 2022. 61 hedge funds held stakes in Abbot Laboratories (NYSE:ABT). The total value of these stakes amounted to $3.60 billion.

Here is what Diamond Hill Capital had to say about Abbot Laboratories (NYSE:ABT) in its first-quarter 2022 investor letter:

“Abbott Labs announced a recall of its infant formula brand Similac^® in the US. Though the recall will impact near-term revenues, we are not concerned about any long-term impacts. We remain optimistic about the company’s prospects over the long run because, in our view, it is one of the highest quality names in health care with a talented management team that makes smart capital allocation decisions. Abbott also has leading health care and consumer franchises with a particularly strong competitive position in the medical device business. Abbott continues to launch innovative products in key strategic areas (such as diabetes, structural heart and diagnostics), which should help drive not only revenue growth but margin expansion.”

7. McDonald’s Corporation (NYSE:MCD)

Bridgewater Associates’ Stake Value: $511,433,000

Percentage of Bridgewater Associates’ 13F Portfolio: 2.16%

Number of Hedge Fund Holders: 50

McDonald’s Corporation (NYSE:MCD) released its earnings for the fiscal second quarter of 2022 on July 26. The company reported earnings per share of $2.55 and beat EPS estimates by $0.08. The company generated a revenue of $5.72 billion. As of September 21, McDonald’s Corporation (NYSE:MCD) has returned 8.5% to investors over the past six months, and the stock is offering a forward dividend yield of 2.16% which the company supports with free cash flows of $6 billion.

Wall Street analysts see upside to McDonald’s Corporation (NYSE:MCD). On August 30, Tigress Financial analyst Ivan Feinseth raised his price target on McDonald’s Corporation (NYSE:MCD) to $320 from $314 and reiterated a Buy rating on the shares. Feinseth noted that McDonald’s Corporation (NYSE:MCD) has a robust business model which will help it to drive outperformance in all economic cycles. On September 7, Piper Sandler analyst Nicole Miller Regan raised her price target on McDonald’s Corporation (NYSE:MCD) to $270 from $263 and remained Overweight on the stock.

At the close of Q2 2022, 50 hedge funds disclosed ownership of stakes in McDonald’s Corporation (NYSE:MCD). These funds held collective stakes of $2.30 billion in the company. As of June 30, Bridgewater Associates owns over 2 million shares of McDonald’s Corporation (NYSE:MCD). The investment covers 2.16% of Ray Dalio’s 13F portfolio.

Like The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), and Johnson & Johnson (NYSE:JNJ), McDonald’s Corporation (NYSE:MCD) is a dividend aristocrat and has a track record of over 30 years of consecutive dividend increases.

6. Walmart Inc. (NYSE:WMT)

Bridgewater Associates’ Stake Value: $571,146,000

Percentage of Bridgewater Associates’ 13F Portfolio: 2.42%

Number of Hedge Fund Holders: 67

Wall Street analysts are bullish on Walmart Inc. (NYSE:WMT). On August 18, Morgan Stanley analyst Simeon Gutman raised his price target on Walmart Inc. (NYSE:WMT) to $150 from $145 and reiterated a buy-side Overweight rating on the shares. On September 14, KeyBanc analyst Bradley Thomas initiated coverage of Walmart Inc. (NYSE:WMT) with an Overweight rating and a $155 price target.

The big-box retailer reported earnings for the fiscal second quarter of 2023 on August 16. Walmart Inc. (NYSE:WMT) reported sales of $151 billion, up 8% year over year, and ahead of Wall Street consensus by $1.40 billion. The company reported earnings per share of $1.77 and beat estimates by $0.17.

Walmart Inc. (NYSE:WMT) has been growing its dividends for over 4 decades now. As of September 21, the stock is offering a forward dividend yield of 1.68% and has free cash flows of $5.4 billion.

Insider Monkey spotted Walmart Inc. (NYSE:WMT) on 67 investment portfolios at the close of Q2 2022. The total stakes of these hedge funds amounted to $3.78 billion. As of June 30, Bridgewater Associates’ stake in Walmart Inc. (NYSE:WMT) sits at $571 million. The investment covers 2.42% of Ray Dalio’s 13F portfolio.

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