In this article, we take a look at the 10 best diversified stocks to buy now. You can skip our detailed analysis on diversification strategy and go directly to 5 Best Diversified Stocks to Buy Now.
Diversification is a relatively safer investment approach than concentrated stock investment without compromising on returns as significantly as concentrated bond investments. Data from CFA Society shows the average individual returns for US stocks and bonds at 11.50% and 7.87%, respectively, from 1990 to 2014 but in diversified portfolios during the same period with a 60:40 asset class allocation (60% equity, 40% debt securities), the average annual return of the portfolio was 10.05%. The difference of return is only marginal in concentrated stock investment and diversified investment but the benefit of avoiding stock market volatility certainly outweighs it given that the concentrated stocks portfolio had a standard deviation of return (SDR) of 18.49% compared to 10.04% SDR for the diversified portfolio.
But as it is evident by now, stock market is superior in terms of returns. The average return when it comes to low-risk instruments like long-term bonds is roughly 5-6% while average annual return from the stock market stands at 10% since 1926 according to investment researcher Morningstar.
Moreover, according to a Credit Suisse report, the global equity market has also been outperforming the global bonds and bills market with the former establishing an annual average return of 5.3% relative to a 0.7% annual average return for bills and 2% return for bonds. On top of that, equity market has historically outperformed gold and real estate market over the long run as well.
So the stock market is naturally attractive. Fortunately, there’s ways to diversify using the stock market alone. It is through investing in diversified stocks: conglomerates with multiple business lines, some of which outperform when the rest are down and vice versa because some sectors naturally perform in economic conditions where others don’t.
For instance, when interest rates are raised during times of high inflation as a remedial measure, the situation leads to a lot of sectors in the stock market getting negatively affected while consumer discretionary sectors, finance and health sectors hold up relatively well and even benefit from such hikes. Growth sectors that include front-line technology companies are affected far more than value stocks when stocks are valued using discounted-cash-flow method in periods of high inflation.
Similarly, during a recession, stocks that remain relatively well-off belong to the consumer staples sector because the consumer buys essential products like food, toiletries and household goods regardless of the macroeconomic condition.
Coming down to 2022, the risks surrounding the occurrence of a recession in the near-term are becoming real due to high inflation leading to interest rate hikes by US Federal Reserve and disruptions of supply chains tied to Russian-Ukrainian conflict and resulting western sanctions on Russia, at-least that’s the talk of the lower Broadway as of late. Goldman Sachs put the likelihood of a recession happening in the next 24 months at 38%.
So for investors who want to diversify using the stock market alone, we’ve listed the best stocks that are liberally diversified across different and unrelated sectors. For this reason, we’d be omitting stocks like Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Meta Platforms, Inc. (NASDAQ:FB) which are diversified but only within one sector.
Here, we list 10 best diversified stocks to buy now.
Technology share chart
Our Methodology
For our list of the 10 best diversified stocks to buy now, we’d be using various metrics like debt to equity ratio, current ratio and return on equity ratio to evaluate how well a company weathers crisis-events like recession and hyperinflation. We’d also be assigning weight to the hedge funds’ sentiment for the given stocks. Most importantly, we’d be considering the number of sectors and sub-sectors a conglomerate is doing business in.
Let’s now move down to the list of 10 best diversified stocks to buy now.
10. Carlisle Companies Incorporated (NYSE:CSL)
Number of Sectors: 3
Number of Hedge Fund Holders: 21
Carlisle Companies Incorporated (NYSE:CSL) is an Arizona-based diversified company representing the industrial, utilities and materials sectors. Over its history, Carlisle Companies Incorporated (NYSE:CSL) acquired over 80 companies to diversify its business lines.
Carlisle Companies Incorporated (NYSE:CSL) manufactures and supplies single-ply roofing products and warranted systems like panel systems, waterproofing and moisture protection products, optical fibers, cable assemblies, defense electronics and medical devices through its various subsidiaries. The corporation caters to commercial, defense, aerospace, residential and industrial markets.
Carlisle Companies Incorporated (NYSE:CSL) beat analysts’ expectations for revenue by $153 million for the first quarter of 2022 with a revenue of $1.50 billion. The company shares had an ‘Outperform’ rating by two analysts at Baird and Oppenheimer on April 29. On May 9, Credit Suisse analyst Daniel Oppenheim raised the price target on Carlisle Companies Incorporated (NYSE:CSL) to $300 from $275 while keeping a ‘Neutral’ rating on the shares but stressed that underlying trends in the company drive upside potential.
The hedge fund sentiment for the stock in the first quarter of 2022 is optimistic with Generation Investment Management being the leading stakeholder in Carlisle Companies Incorporated (NYSE:CSL) with an equity worth $41 million that’s almost 2% of their portfolio. The hedge fund most bullish on the stock was Balyasny Asset Management which increased their holding by 197% in the same quarter.
Carlisle Companies Incorporated (NYSE:CSL) is not remotely comparable in size to Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Meta Platforms, Inc. (NASDAQ:FB) but it is much more diversified across sectors.
9. Colgate-Palmolive Company (NYSE:CL)
Number of Sectors: 3
Number of Hedge Fund Holders: 48
Colgate-Palmolive Company (NYSE:CL) is a prominent US based multinational company specializing in consumer discretionary, consumer staples and healthcare sectors. It manufactures and supplies personal care, skin care, dental care, healthcare and veterinary products.
Colgate-Palmolive Company (NYSE:CL) boasts a current ratio of 1.09 as of the first quarter of 2022 and is likely to have no problem in bailing itself out of short-term debt obligations should economic conditions worsen. On May 13, Stifel analyst Mark Astrachan lowered the price target on Colgate-Palmolive Company (NYSE:CL) to $88 from $90 keeping a ‘Hold’ rating on the shares.
The analyst expects “more upside than downside” for Colgate-Palmolive Company (NYSE:CL) stocks driven by multiple expansion as growth in sales remains at the high-end of the corporation’s long-term 3%-5% targets. Colgate-Palmolive Company (NYSE:CL) is a dividend paying stock with annual dividend yield of 2.43% as of May 25.
Moving on to the hedge fund sentiment, 48 hedge funds were bullish on Colgate-Palmolive Company (NYSE:CL) stock in the last quarter of 2021. As of Q1, 2022, First Eagle Investment Management is the leading stakeholder in the company with shares worth $857 million.
8. General Electric Company (NYSE:GE)
Number of Sectors: 7
Number of Hedge Fund Holders: 57
General Electric Company (NYSE:GE) is one of the largest diversified conglomerates in the world, headquartered in Boston, Massachusetts. Its business involves industrials, materials, information technology, healthcare, finance, energy and utilities sectors. General Electric Company (NYSE:GE) operates further in various sub-sectors like biology, applied physics, renewable energy and artificial intelligence among others, through its R&D wing. In that sense, it’s both a value stock as well as a growth stock.
This is what the Vulcan Value Partners had to say about General Electric Company (NYSE:GE) when they sold their position on the stock in the third quarter of 2021 after its strong price increase.
“During the quarter, we sold our positions in General Electric Co. General Electric is a company we followed for a long time. In the past, we removed GE from the MVP list due to management’s poor capital allocation decisions which resulted in value instability. Larry Culp, the former CEO of Danaher, became CEO of General Electric in 2018. The company implemented a vast restructuring program to simplify the industrial side of its business, sold off non-core assets, paid down debt with the proceeds, and drastically shrunk GE Capital. These restructuring activities allowed its world-class jet engine and healthcare businesses to shine through, and improved value stability. As a result, we added the company back to the MVP list. While the pandemic negatively impacted General Electric’s aviation business in the short run, it also gave us the opportunity to buy General Electric in the second quarter of 2020 with a substantial margin of safety. GE is a good example of a competitively entrenched, yet slower growing MVP business. As its stock price rose rapidly over the last year, its value growth did not keep up, and the price to value gap closed quickly. As our margin of safety diminished, we sold our position in GE and allocated it to more discounted companies.”
General Electric Company (NYSE:GE) is lately known to be expanding farther in the healthcare sector. On May 12, GE Healthcare signed a contract to invest roughly $50M in Israeli based start-up Pulsenmore, marking another strategic step towards enabling precision health. GE said the investment’s objective is to accelerate adoption of Pulsenmore’s homecare ultrasound solutions globally.
On April 29, Barclays analyst Julian Mitchell lowered the price target on General Electric Company (NYSE:GE) to $100 from $115 and kept an ‘Overweight’ rating on the stock. General Electric Company (NYSE:GE) had a current ratio of 1.19 in the first quarter of 2022, signifying low risk and the ability to service short-term debt obligations.
7. Emerson Electric Co. (NYSE:EMR)
Number of Sectors: 7
Number of Hedge Fund Holders: 43
Emerson Electric Co. (NYSE:EMR) is a US based conglomerate doing business in 6 sectors. These include industrial, energy, materials, consumer discretionary, consumer staples, healthcare and information technology sectors. It manufactures diverse range of products through its various subsidiaries. Its diverse range includes products in construction, automation, biotechnology, enterprise software, home appliances, pharmaceuticals, energy efficiency, commercial appliances, industrial appliances, cybersecurity, aviation and defense.
Citi analyst Andrew Kaplowitz lowered the price target on Emerson Electric Co. (NYSE:EMR) to $111 from $119 as well as kept a ‘Buy’ rating on the shares. The analyst expects “several favorable aspects” for Emerson Electric Co. (NYSE:EMR) from the Aspen Technology (AZPN) transaction. Kaplowitz told investors in a research note that Aspen’s recent performance including favorable topline and earnings trends looks well aligned with Emerson’s strategic objective of producing accelerating growth over the course of time.
43 Hedge funds were bullish on Emerson Electric Co. (NYSE:EMR) in the last quarter of 2021. The company had an annual dividend yield of 2.38% as of May 26. Its recent dividend payout was $0.51 per share on March 10, 2022, in line with the previous one. As of the first quarter of 2022, Millennium Management is the most bullish on Emerson Electric Co. (NYSE:EMR) with a stake of $207 million.
6. Honeywell International Inc. (NASDAQ:HON)
Number of Sectors: 6
Number of Hedge Fund Holders: 51
Number 6 on the list of 10 best diversified stocks to buy now is Honeywell International Inc. (NASDAQ:HON). It is a global conglomerate operating in primarily five sectors. These are industrial, materials, utilities, information technology, healthcare and consumer staples. Within these sectors, Honeywell International Inc. (NASDAQ:HON) manufactures a diverse range of products that satisfies different sub sectors from electronics to chemicals.
The hedge fund sentiment pertaining to Honeywell International Inc. (NASDAQ:HON) has been rather optimistic. This is what ClearBridge Investments had to say about the company in their first quarter letter in 2021.
“The portfolio’s quality bias and valuation discipline have generated compelling returns over time with typically strong relative results in more challenging environments as it did through the first three quarters of 2020. However, that same quality bias tends to create a more challenging relative performance environment for the Strategy during periods of sharp economic acceleration, which tend to benefit stocks that are more commodity linked or of lower quality. This has been the case during the vaccine- and stimulus-driven rally experienced late last year and during the most recent quarter. Sectors that lagged in the quarter included industrials, Honeywell also lagged in the quarter after previously generating strong returns over extended periods.”
As of the first quarter of 2022, D.E Shaw is the leading stakeholder in Honeywell International with a holding worth $415 million. It is followed by Two Sigma Advisors with an equity of $301 million. Analysts also had a favorable outlook for HON stock in the month of May. On May 2, Citi analyst Andrew Kaplowitz raised the price target on Honeywell International to $232 from $229 and kept a ‘Buy’ rating on the shares. The analyst views the company’s Q1 results as indicative of its capacity to “effectively execute” despite pressures from supply chain disruptions and inflation.
Unlike Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Meta Platforms, Inc. (NASDAQ:FB), Honeywell International Inc. (NASDAQ:HON) does not offer products in information technology sector.
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Disclosure: none. 10 Best Diversified Stocks to Buy Now is originally published on Insider Monkey.
