In this article, we discuss 10 cash-rich defensive stocks to buy before recession. If you want to read about some more cash-rich defensive stocks to buy before recession, go directly to 5 Cash-Rich Defensive Stocks to Buy Before Recession.
The average savings of daily Americans are drying up as the United States economy slows down. Data from the New York Fed indicates that it is becoming more challenging for lower income households to make payments as job openings come down, unemployment claims go up, and inflation continues to hover at near record levels. Governmental measures like unemployment benefits, stimulus checks, an eviction ban, and low interest rates, which had helped lower income workers, have all but ended as well.
The housing market is also cooling off, adding to recession fears at the stock market. Data from real estate firm Redfin shows that home sale cancellations are touching multi-year highs. In July, 63,000 home purchase agreements were called off, representing 16% of homes that went into contract during the month. This is a 1% increase from the cancelations in the month of June. A slow housing market could be a major headwind for the US economy that is already reeling from other pressures, per Bill Adams, the chief economist at Comerica Bank.
Investors are thus flocking to cash-rich defensive options that guarantee safe haven from the larger economic crisis. Some of these include Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG). The central bank in the US is poised to approve another rate hike in September after raising the rate by 75 basis points in both June and July. This increase could trigger even more interest in cash-rich defensive plays at the marketplace.
Our Methodology
The companies that are cash-rich and deliver products or services that can withstand a larger economic slowdown were selected for the list. The business fundamentals of these firms and the latest updates related to them are also discussed to provide some additional context. Data from around 900 elite hedge funds tracked by Insider Monkey in the second quarter of 2022 was used to identify the number of hedge funds that hold stakes in each firm.
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Cash-Rich Defensive Stocks to Buy Before Recession
10. General Electric Company (NYSE:GE)
Number of Hedge Fund Holders: 49
Free Cash Flow as of August 29: $3.34 billion
General Electric Company (NYSE:GE) is a high-tech industrial firm. In late July, the firm posted earnings for the second quarter of 2022, reporting earnings per share of $0.78, beating analyst expectations by $0.36. The revenue over the period was $18.6 billion, up over 1.5% compared to the revenue over the same period last year and beating estimates by $700 million. The firm revealed that organic orders during the quarter had grown by 4% and total orders raked in more than $18.7 billion.
On August 16, Bernstein analyst Brendan Luecke resumed coverage of General Electric Company (NYSE:GE) stock with an Outperform rating and a price target of $100, noting that the Inflation Reduction Act would help boost the sales of the firm in the coming months.
At the end of the second quarter of 2022, 49 hedge funds in the database of Insider Monkey held stakes worth $3.8 billion in General Electric Company (NYSE:GE), compared to 51 in the previous quarter worth $4.8 billion.
Just like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), General Electric Company (NYSE:GE) is one of the stocks on the radar of elite investors.
In its Q2 2022 investor letter, Vulcan Value Partners, an asset management firm, highlighted a few stocks and General Electric Company (NYSE:GE) was one of them. Here is what the fund said:
“We purchased General Electric Company (NYSE:GE) during the quarter. In 2018 Larry Culp became CEO and initiated a multi-year restructuring program. After many years of divesting and restructuring the business, the company’s attractive assets are showing through. GE operates in four segments: aviation, health care, power, and renewables. The aviation segment makes and services jet engines and generates around 55% of its profits. The health care segment produces a broad suite of diagnostic products and generates around 40% of profits. The other two segments, power and renewables, are making improvements, and will be combined and spun off in early 2024. GE continues to unlock shareholder value and strengthen its balance sheet. The company also generates solid free cash flow. Recent stock price volatility provided an opportunity for us to purchase the stock, once again, with a margin of safety.”
9. AT&T Inc. (NYSE:T)
Number of Hedge Fund Holders: 55
Free Cash Flow as of August 29: $14.33 billion
AT&T Inc. (NYSE:T) is a media, communications, and technology firm. On July 21, the firm posted earnings for the second quarter of 2022, reporting earnings per share of $0.65, beating analyst expectations by $0.03. The revenue over the period was more than $29 billion, down close to 17% compared to the revenue over the same period last year and beating estimates by $130 million. The firm also revealed that it was increasing mobility service revenue guidance to 4.5-5% growth for the full year.
On August 18, MoffettNathanson analyst Craig Moffett maintained a Market Perform rating on AT&T Inc. (NYSE:T) stock and lowered the price target to $17 from $19, noting that the firm had accelerated subscriber growth but cut dividend forecasts.
At the end of the second quarter of 2022, 55 hedge funds in the database of Insider Monkey held stakes worth $1.7 billion in AT&T Inc. (NYSE:T), compared to 74 in the preceding quarter worth $4 billion.
In its Q2 2022 investor letter, Argosy Investors, an asset management firm, highlighted a few stocks and AT&T Inc. (NYSE:T) was one of them. Here is what the fund said:
“I purchased shares of AT&T Inc. (NYSE:T) prior to its spin-off of Warner Brothers Discovery (WBD). Most people are probably familiar with AT&T. They are a major cellular service provider, and until recently owner of the Time Warner media assets, which include HBO, CNN, TNT, TBS, Cartoon Network, DC Comics and the Batman content brands, and more. At the time of my purchase, I estimated that the combined T/WBD assets traded at a 15% levered FCF yield, or 6x FCF. I also believe that WBD, which now has HBO Max, has future growth in front of it which was previously in doubt when Discovery was primarily tied to the declining cable television bundle. Since then, Netflix reported disappointing subscriber growth, which threw all streaming companies into disarray. WBD followed that news with a disappointing outlook on its business during its own quarterly earnings.
As a result, shares of WBD have declined nearly 40% since the spin-off. WBD now trades for 7x 2023E FCF and there is great potential for returns over the next few years as WBD pays down debt used to finance its merger combining Warner Brothers and Discovery and grows. We do not own a large position in WBD at present, but we may add to it over time.”
8. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 60
Free Cash Flow as of August 29: $10.24 billion
The Coca-Cola Company (NYSE:KO) is a beverage company based in Georgia. In late July, investment advisory Morgan Stanley, in a research note to clients, identified The Coca-Cola Company (NYSE:KO) as one of the attractive companies that operated in beverages, a preferred sector for investors to target as a worsening economic backdrop threatens consumer spending broadly. The investment bank underlined that the things that gave the firm advantages in the market were pricing power, post-COVID recovery, and the benign competitive dynamics of the industry.
On July 20, JPMorgan analyst Andrea Teixeira maintained an Overweight rating on The Coca-Cola Company (NYSE:KO) stock and lowered the price target to $70 from $73, backing the firm to continue as a defensive holding with upside with strong underlying momentum.
Among the hedge funds being tracked by Insider Monkey, Nebraska-based firm Berkshire Hathaway is a leading shareholder in The Coca-Cola Company (NYSE:KO), with 400 million shares worth more than $25 billion.
7. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Holders: 70
Free Cash Flow as of August 29: $28.44 billion
Pfizer Inc. (NYSE:PFE) makes and sells biopharma products. On August 28, the company announced the results from a study that a bivalent vaccine candidate for the respiratory syncytial virus had led to an 86% of efficacy against the severe disease in those aged 60 years and older. The firm aims to access a $10 billion market for RSV vaccines through the drug. The company is one of the most reliable drug stocks in the US, with a dividend history stretching back more than three decades.
On August 1, investment advisory Barclays maintained an Equal Weight rating on Pfizer Inc. (NYSE:PFE) stock and raised the price target to $52 from $50. Analyst Carter Gould issued the ratings update.
At the end of the second quarter of 2022, 70 hedge funds in the database of Insider Monkey held stakes worth $2.8 billion in Pfizer Inc. (NYSE:PFE), compared to 79 in the preceding quarter worth $4.1 billion.
In its Q4 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Pfizer Inc. (NYSE:PFE) was one of them. Here is what the fund said:
“While the level of general turnover abated as we progressed through 2021, it remained high in one area: post-COVID-19 recovery plays. The concept behind this investment thesis was, and still is, straightforward: with the advent of effective vaccines, the path from pandemic to endemic is just a matter of time. As this transition occurs, the estimated excess savings of over $2 trillion built up on U.S. consumer balance sheets will unlock dramatic pent-up demand for experiences, especially global travel. This investment case seemed especially compelling when the Pfizer vaccine positively surprised markets in November 2020. As a result, we made post-COVID-19 stocks (which were trading well below our estimate of recovery value) a sizable theme within the portfolio. We understood this to be a more aggressive tilt in positioning because it required a major improvement in demand to catalyze fundamentals and drive price toward higher business values. While we accepted that recovery would not be smooth and that it would take time to deploy vaccines both domestically and globally, we decided that recovery was the logical path of least resistance and we were being well compensated for these risks.
What we did not account for, however, was vaccine hesitancy and the risk of further infection waves. As a result, the first variant wave, Delta, was a negative surprise to both the market and our team. When the risk surfaced, we immediately updated our probability-driven models and debated how we should react. The resulting conclusion was that the recovery would be delayed and that we should reduce our exposure quickly, subsequently targeting the most aggressive recovery stocks such as cruise lines. We again acted swiftly and decisively to the positive surprise that Pfizer Inc. (NYSE:PFE) had delivered a high-efficacy antiviral COVID-19 pill. This pill should greatly reduce COVID-19 severity risks globally, increasing the probability of a global travel recovery in 2022. While this is still true, the emergence of the highly mutated Omicron variant set off another infection wave which spurred us to again act quickly and further reduce our risk exposure. This back-and-forth may sound exhausting, but it highlights our compulsion to act if we determine a surprise has a large enough impact on the probabilities that power our valuation-driven investment cases.”
6. UnitedHealth Group Incorporated (NYSE:UNH)
Number of Hedge Fund Holders: 91
Free Cash Flow as of August 29: $20.45 billion
UnitedHealth Group Incorporated (NYSE:UNH) operates as a diversified healthcare firm. The company has an impressive dividend profile. It has paid a dividend to shareholders consistently for the past nineteen years. In the past twelve years, these payouts have registered consistent growth as well, in a sector where the median in this regard is just two years. On August 17, the firm declared a quarterly dividend of $1.65 per share, in line with previous. The forward yield was 1.21%.
On July 25, Argus analyst David Toung maintained a Buy rating on UnitedHealth Group Incorporated (NYSE:UNH) stock and raised the price target to $650 from $580, appreciating the solid earnings of the firm in the second quarter and raised guidance.
At the end of the second quarter of 2022, 91 hedge funds in the database of Insider Monkey held stakes worth $10.9 billion in UnitedHealth Group Incorporated (NYSE:UNH), compared to 103 in the preceding quarter worth $12.8 billion.
In addition to Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), UnitedHealth Group Incorporated (NYSE:UNH) is one of the stocks that hedge funds are monitoring.
In its Q2 2022 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and UnitedHealth Group Incorporated (NYSE:UNH) was one of them. Here is what the fund said:
“UnitedHealth Group Incorporated (NYSE:UNH) also contributed to performance during the quarter. United’s operating income grew +3% on difficult year-ago comparisons as benefits members utilized more services compared to last year. Optum Health grew operating income +40% as more patients are enrolled in the Company’s value-based care services. The Company estimates nearly a third of all medical care is unnecessary and represents an opportunity to capture savings for both patients. Optum’s integrated platform of patient data, IT, and service providers are focused on driving out these unnecessary costs and should serve as the engine for long-term, mid-teens earnings per share growth.”
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Disclosure. None. 10 Cash-Rich Defensive Stocks to Buy Before Recession is originally published on Insider Monkey.
