13 Best Defensive Stocks To Buy Now

Published on August 27, 2023 at 9:47 am by Fahad Saleem in Hedge Funds, News

In this article, we will take a look at the 13 best defensive stocks to buy now. To see more such companies, go directly to 5 Best Defensive Stocks To Buy Now.

The US stock markets are jumpy amid analyst firms downgrading banks and some analysts suggesting the economy is still not out the recession danger. Fitch recently warned that there’s a chance it might have to downgrade several US banks, including market leader JPMorgan. The news comes after Moody’s downgraded several banks. The industry has already seen the collapse of several regional banks earlier this year.

While the US stock market rebounded earlier this year and latest inflation data pointed to cooling pricing pressures, some circles are seeing market optimism with skepticism. A Bloomberg report recently quoted Jonathan Millar, a senior economist at Barclays Capital Inc., who thinks that the picture will only be clear after at least two quarters. The analyst said that while inflation has come down, the Federal Reserve acknowledges the fact that the possibility of a soft landing “is far from assured.”

Some analysts also believe that the real effects of the Federal Reserve’s incessant rate hikes are yet to be seen. A report or two showing signs of a slight decline in inflation would not be enough to label Fed’s action successful. In the past, whenever the Fed has slapped the economy with consistent rate hikes, the results were tough. A Bloomberg report quoted a study former Fed Vice Chair Alan Blinder, which studied and analyzed 11 monetary policy tightening from 1965 to 2022. Most of the studied hawkish steps caused “hard landings or a reacceleration in inflation two years later.” That means even if inflation comes down in the short term, there would always be a threat of it coming back. That’s why the Federal Reserve has been insisting to bring inflation down to 2%, but many analysts believe that target is too ambitious and might not be achieved even with more rate hikes without tipping the economy in recession.

In this backdrop, it always makes sense to see which defensive stocks money managers and elite hedge funds are betting on. Defensive stocks are always relevant. They aren’t just for recessions or downturns. Having exposure to defensive plays ensures stable and reliable returns as many defensive companies are mature and market leaders with dividend payments and thriving business models.

A 2012 research paper by AQR takes a look at detailed data-based evidence highlighting how low-risk, defensive stocks have outperformed volatile stocks over longer periods of time. The report says:

Historically, risky securities have not generated higher risk- adjusted returns than safe securities within the same asset class. In other words, investors holding safe securities have received much higher compensation relative to the risk they bared. While academics initially referred to this effect as the “low-beta anomaly,” the evidence has been extended to include other risk measures beyond just beta: total volatility, idiosyncratic volatility as well as more fundamental measures of risk, generically referred to as “quality.”

Photo by Kaleidico on Unsplash

Our Methodology

For this article, we first listed down all holdings of the Invesco Defensive Equity ETF (DEF). We then found the number of hedge fund investors for each of these holdings. We then picked 13 stocks from the resultant dataset with the highest number of hedge fund investors. These stocks, hence, are the best defensive stocks to buy according to hedge funds. We gauged hedge fund sentiment for stocks using Insider Monkey’s database of 943 hedge funds. The list is ranked in ascending order of the number of hedge fund investors. The DEF ETF is based on the Invesco Defensive Equity Index (Index) which gives exposure to stocks that “have superior risk-return profiles during periods of stock market weakness while still offering the potential for gains during periods of market strength.”

Best Defensive Stocks To Buy Now

13. Merck & Co., Inc. (NYSE:MRK)

Number of Hedge Fund Holders: 75

One of the biggest pharmaceutical companies, Merck & Co., Inc. (NYSE:MRK) is a solid defensive play due to its pipeline and dividends. Merck & Co., Inc. (NYSE:MRK) shares recently jumped after the company upped its full-year revenue guidance. Merck & Co., Inc. (NYSE:MRK)’s Q2 revenue also remained upbeat amid growing sales of its cancer drug Keytruda and HPV vaccine, Gardasil.

As of the end of the first quarter of 2023, 75 hedge funds in Insider Monkey’s database were long Merck & Co., Inc. (NYSE:MRK). The biggest stakeholder of Merck & Co., Inc. (NYSE:MRK) during this period was Cliff Asness’s AQR Capital Management which owns a $298 million stake in the company.

Baron Health Care Fund made the following comment about Merck & Co., Inc. (NYSE:MRK) in its second quarter 2023 investor letter:

“During the second quarter, Merck & Co., Inc. (NYSE:MRK) filed the first lawsuit (followed by the filing of additional lawsuits by other parties) against the federal government challenging the constitutionality of the Medicare Drug Price Negotiation Program (the Program) that Congress established as part of the Inflation Reduction Act. In Merck’s complaint, Merck argues that the Program violates the Fifth Amendment because it allows the federal government to take Merck’s innovative drugs without providing just compensation for them. In addition, Merck argues the Program violates the First Amendment because it forces them to sign an agreement saying the government mandated prices are fair and the result of a negotiation when in fact, Merck argues, prices are not negotiated or fair. These lawsuits will take time to work their way through the legal process and in the meantime, the Program moves ahead on its scheduled path. The consensus view is that these lawsuits will not be successful, and the Program will remain in place. We suspect Merck’s arguments may convince at least a few U.S. Supreme Court Justices when the case reaches the U.S. Supreme Court, but the ultimate outcome is impossible to predict. For now, we assume the Program will remain in place and invest with that framework in mind.”

12. AbbVie Inc. (NYSE:ABBV)

Number of Hedge Fund Holders: 75

Another pharma giant with a solid dividend history, AbbVie Inc. (NYSE:ABBV) ranks 12th in our list of the best defensive stocks to buy now. In July, AbbVie Inc. (NYSE:ABBV) posted Q2 results. Adjusted EPS in the quarter came in at $2.91, beating estimates by $0.10. Revenue in the period fell 4.9% year over year to $13.87 billion, surpassing estimates by $350 million.

As of the end of the first quarter of 2023, 75 hedge funds in our database of 943 funds reported owning stakes in AbbVie Inc. (NYSE:ABBV). The biggest stakeholder of AbbVie Inc. (NYSE:ABBV) during this period was Ken Griffin’s Citadel Investment Group which owns a $361 million stake in the company.

Baron Health Care Fund made the following comment about AbbVie Inc. (NYSE:ABBV) in its second quarter 2023 investor letter:

“Apart from stock selection, the Fund also benefited from its lower exposure to AbbVie Inc. (NYSE:ABBV), whose shares were down almost 15% in the Benchmark due to concerns about the company’s growth profile after the loss of exclusivity for lead drug Humira. We exited our position during the quarter. We sold AbbVie Inc. due to our less optimistic view of the company’s pipeline and long-term growth profile.”

11. American Express Company (NYSE:AXP)

Number of Hedge Fund Holders: 77

Payment cards company American Express Company (NYSE:AXP) ranks 11th in our list of the best defensive stocks to buy now according to hedge funds. In July American Express Company (NYSE:AXP) posted Q2 results. GAAP EPS in the quarter came in at $2.89 beating estimates by $0.08. Revenue in the quarter jumped 12.3% year over year to $15.05 billion, missing estimates by $310 million. American Express Company (NYSE:AXP) also reaffirmed its 2023 guidance.

As of the end of the first quarter of 2023, 77 hedge funds out of the 943 funds reported having stakes in American Express Company (NYSE:AXP). The biggest stakeholder of American Express Company (NYSE:AXP) during this period was Warren Buffett’s Berkshire with a $25 billion stake in the company.

ClearBridge Large Cap Value Strategy made the following comment about American Express Company (NYSE:AXP) in its first quarter 2023 investor letter:

” Other financial holdings were among the top contributors, such as American Express Company (NYSE:AXP), whose business is less sensitive to changes in the yield curve than most financials, and Progressive, which has minimal interest rate mismatch exposure.”

10. CVS Health Corporation (NYSE:CVS)

Number of Hedge Fund Holders: 77

CVS Health Corporation (NYSE:CVS) ranks 10th in our list of the best defensive stocks to buy now according to hedge funds. CVS Health Corporation (NYSE:CVS) recently posted Q2 results. Adjusted EPS in the quarter came in at $2.21, beating estimates by $0.09. Revenue in the period jumped 10.3% year over year to $88.92 billion, beating estimates by $2.39 billion.

As of the end of the first quarter of 2023, 77 hedge funds in Insider Monkey’s database of 943 hedge funds reported owning stakes in CVS Health Corporation (NYSE:CVS). The most significant stakeholder of CVS Health Corporation (NYSE:CVS) was John Overdeck and David Siegel’s Two Sigma Advisors which owns a $406 million stake in the company.

Coho Partners Relative Value Equity Fund made the following comment about CVS Health Corporation (NYSE:CVS) in its second quarter 2023 investor letter:

“In December of 2017, CVS Health Corporation (NYSE:CVS) agreed to buy Aetna, which broadened its offering by entering the managed care business. CVS has been moving its portfolio to a more value-based outcome model, and Aetna was a major move in that direction. We were willing to accept the leverage that came with the deal because CVS has a very cash generative model, and we anticipated the free cash flow would enable the company to de-lever fairly quickly.

By mid-2022, CVS was in a position to use the free cash flow that had been going to debt repayment to do bolt-on deals to further prepare for the value-based outcome model and/or return more cash to shareholders in the form of higher dividends or share repurchases. However, CVS lost a “star” in its largest Medicare plan in late 2022 and this will adversely impact earnings in 2024. This was a surprise and disappointment to us, but management should be able to regain the “star” in the back half of 2023, which will then give the company a nice tailwind in 2025…” (Click here to read the full text)

9. Elevance Health, Inc. (NYSE:ELV)

Number of Hedge Fund Holders: 81

Health insurance company Elevance Health, Inc. (NYSE:ELV) is one of the best defensive stocks to buy now. As of the end of the first quarter of 2023, 81 hedge funds out of the 943 in Insider Monkey’s database reported owning stakes in Elevance Health, Inc. (NYSE:ELV). The biggest stakeholder of Elevance Health, Inc. (NYSE:ELV) was Andreas Halvorsen’s Viking Global which owns a $991 million stake in the company.

8. Union Pacific Corporation (NYSE:UNP)

Number of Hedge Fund Holders: 85

Union Pacific Corporation (NYSE:UNP) is one of the best defensive stocks to buy now. As of the end of the first quarter of 2023, 85 hedge funds in Insider Monkey’s database of hedge funds reported owning stakes in Union Pacific Corporation (NYSE:UNP). The most significant hedge fund stakeholder of Union Pacific Corporation (NYSE:UNP) was Eric W. Mandelblatt’s Soroban Capital Partners which owns a $1.6 billion stake in the company. In July, Union Pacific Corporation (NYSE:UNP) jumped after the company appointed a new CEO. The development came after Soroban Capital Partners pressured Union Pacific Corporation (NYSE:UNP) to replace its CEO. After the CEO change news, RBC upgraded the stock to Outperform from Sector Perform with a $282 price target.

Madison Sustainable Equity Fund made the following comment about Union Pacific Corporation (NYSE:UNP) in its second quarter 2023 investor letter:

“Union Pacific Corporation (NYSE:UNP) released its annual Sustainability report. Highlights include improved safety metrics as a result of its comprehensive approach to safe train operations through the use of technology in combination with training of its workforce. Train derailments declined by 21% compared to 2019. The company implemented a new qualitative cybersecurity risk management system to protect from cyber events. To date, the company has not experienced any material disruption due to a cyber attack or threat. The report also highlighted its annual giving with $24 million in donations across 2,500 non-profit organizations in 2022.”

7. Johnson & Johnson (NYSE:JNJ)

Number of Hedge Fund Holders: 86

With over 61 years of consistent dividend hikes and a diversified business model, Johnson & Johnson (NYSE:JNJ) is perhaps one of the most popular defensive plays. Johnson & Johnson (NYSE:JNJ) has gained about 4.4% over the past one year.

Johnson & Johnson (NYSE:JNJ) recently said the FDA approved its oral anti-cancer agent Akeega as a combination therapy for certain adults with metastatic castration-resistant prostate cancer (mCRPC).

As of the end of the first quarter of 2023, 86 hedge funds tracked by Insider Monkey were long Johnson & Johnson (NYSE:JNJ). The biggest stakeholder of Johnson & Johnson (NYSE:JNJ) during this period was D. E. Shaw with a $609 million stake in the company.

ClearBridge Large Cap Value Strategy made the following comment about Johnson & Johnson (NYSE:JNJ) in its first quarter 2023 investor letter:

“The tech-dominated quarter was a headwind for both defensive and cyclical sectors, with shares of health care holdings such as UnitedHealth Group (UNH), Elevance (ELV) and Johnson & Johnson (NYSE:JNJ) declining after a strong 2022.”

6. S&P Global Inc. (NYSE:SPGI)

Number of Hedge Fund Holders: 90

Ratings and financial data company S&P Global Inc. (NYSE:SPGI) ranks 6th in our list of the best defensive stocks to buy now. S&P Global Inc. (NYSE:SPGI) has upped its dividend consistently for the last 50 years, a no ordinary feat. In late July S&P Global Inc. (NYSE:SPGI) posted Q2 results. Adjusted EPS in the quarter came in at $3.12, missing estimates by $0.01. Revenue in the quarter jumped 3.7% year over year to $3.1 billion, beating estimates by $40 million.

As of the end of the first quarter of 2023, 90 hedge funds out of the 943 hedge funds tracked by Insider Monkey had stakes in S&P Global Inc. (NYSE:SPGI).

Here is what Aristotle Atlantic Partners has to say about S&P Global Inc. (NYSE:SPGI) in its Q2 2023 investor letter:

“S&P Global provides financial information and analytics, including credit ratings, financial market benchmarks and workflow solutions. Originally McGraw-Hill Financial, the company changed its name in 2016. The company’s operations consist of five segments: ratings, commodity insights, indices, market intelligence and mobility.

We see S&P Global’s diversified business model as primarily subscription-based, which generates a sizeable recurring revenue stream and helps it navigate various market or macroeconomic environments. The company has a significant competitive advantage that provides substantial barriers to entry and sustainable competitive supremacy. We believe that technologyfocused strategic investments made over the past few years should help accelerate organic growth over the next few years, as the company continuously seeks to improve its existing offerings while striving to meet ever-evolving client needs.”

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