In this article, we discuss the 3 defensive stocks to buy in 2022 according to Seth Klarman. If you want to read our detailed analysis of Seth Klarman’s investment strategy and views on the current market situation, go directly to 6 Defensive Stocks To Buy in 2022 According to Seth Klarman.
3. Post Holdings, Inc. (NYSE:POST)
Percentage of Baupost Group’s 13F portfolio: 0.28%
Value of Baupost Group’s Stake: $26.2 million
Number of Hedge Fund Holders: 36
Post Holdings, Inc. (NYSE:POST) is a consumer packaged goods company which sells refrigerated, center-of-the-store, food ingredients, and nutrition food products through a range of brands. Despite the recent market sell-off, POST ranks among a number of food retail brands showing strong performance as investors rotate towards defensive stocks. As of June 17, Post Holdings, Inc. (NYSE:POST) has gained 9.53% in the last 6 months, while the S&P500 has slumped nearly 21% over the same period.
On May 9, Piper Sandler analyst Michael Lavery raised the firm’s price target on Post Holdings, Inc. (NYSE:POST) to $96 from $84 and maintained an ‘Overweight’ rating on the company shares. He retained a bullish view on the shares and updated his model to reflect a faster recovery in Foodservice margins, driving his FY2022 EBITDA estimate to the high-end guidance. In June, the company announced that it would invest $110 million to expand its cereal production capacity at its Nevada facility, in order to meet consumer demand, solve capacity constraints, and boost local production for West Coast customers.
Heartland Advisors, an investment firm, talked about the history and performance of Post Holdings, Inc. (NYSE:POST) in its Q1 2021 investor letter. Here’s what it said:
“The run up in equity prices over the past several months has narrowed the pool of attractively valued businesses. Economically sensitive areas of the market, in particular, have seen valuations stretched—but the impact of investor exuberance is evident in share prices of companies throughout the broader market. In response, we continue to focus on finding and owning companies that are poised to succeed against a variety of backdrops or those that are priced at significant discounts to peers regardless of the sector or industry. Recent addition Post Holdings, Inc. (POST) is an example of the type of business we’ve found attractive.
Post manufactures and markets food products through five business lines including a breakfast cereals unit, a food service division, refrigerated retail products, and active nutrition. Shares of the company came under pressure due to the severe impact the COVID-19 economic shutdown had on its food service segment.
Additionally, investors were wary of the company’s use of debt given the uncertainty surrounding how long the economic pullback would last. The bear case against the stock, in our view, is overblown.
In recent years, Post has transformed itself into a higher-growth packaged food enterprise with a diversified portfolio that, taken as a whole, possesses superior growth and free cash flow characteristics vs. its peers. Despite this, shares sell at a meaningful discount to the peer group based on enterprise value/earnings before interest taxes depreciation and amortization, as well as our estimates of the company’s intrinsic value. As the economy returns to normal, Post’s food service line should rebound, and we believe investors will gain a greater appreciation of the company and its stock.”
2. Archaea Energy Inc. (NYSE:LFG)
Percentage of Baupost Group’s 13F portfolio: 0.7%
Value of Baupost Group’s Stake: $65.48 million
Number of Hedge Fund Holders: 32
Archaea Energy Inc. (NYSE:LFG) is a Texas-based energy firm which deals in the production of renewable natural gas (RNG) by processing waste emissions from landfills.
Barclays analyst Theresa Chen initiated coverage of Archaea Energy Inc. (NYSE:LFG) with an ‘Overweight’ rating and a $26 price target on June 17. Archaea is a leading RNG company with long-term contracts that highlight its massive growth potential, according to Chen, who views the macro backdrop for RNG as being “highly constructive,” with demand set to double by 2030. She pointed out that Archaea Energy Inc. (NYSE:LFG) has a backlog of 88 top-notch RNG development projects for which gas rights agreements have already been signed, with 32.5 years of average remaining life. As of June 17, LFG stock has posted gains of 12.59% in the last 12 months, and 8% in the last month alone.
For the first quarter of 2022, Archaea Energy Inc. (NYSE:LFG) reported an EPS of $0.15, beating Street estimates by $0.09. However, quarterly revenue of $56.9 million fell below consensus estimates by $8.9 million.
With 3.12 million shares valued at around $65.5 million, Archaea Energy Inc. (NYSE:LFG) stock represented 0.7% of Seth Klarman’s first quarter portfolio. Overall, investors were eager on the unique energy company, with 32 hedge funds reporting bullish bets, as compared 26 hedge funds in the previous quarter.
1. Encompass Health Corporation (NYSE:EHC)
Percentage of Baupost Group’s 13F portfolio: 2.29%
Value of Baupost Group’s Stake: $213.33 million
Number of Hedge Fund Holders: 48
Encompass Health Corporation (NYSE:EHC) is one of the best defensive stocks to buy according to Seth Klarman, who increased his stake in the firm by 319% in the first quarter to stand at 3 million shares priced at $213.3 million. Healthcare stocks with well-established business models and stable earnings provide investors a safe place to park their money in times of economic slowdown. Encompass Health Corporation (NYSE:EHC) provides post-acute healthcare services through its segments: Inpatient Rehabilitation, and Home Health and Hospice. The firm has a market cap of $5.63 billion, and offers a stable dividend yield of 1.99% as of June 17.
Raymond James analyst John Ransom on June 17 reiterated a ‘Strong Buy’ rating on Encompass Health Corporation (NYSE:EHC) shares, and revised the price target to $70 from $85. The company recently provided separate guidance for both its segments, ahead of the planned spinoff of its ‘Enhabit’ home health and hospice segment on July 1, which will form an independent company under the ticker EHAB. The analyst noted that the company’s updated 2022 EBITDA guidance came in around $17 million lower than his estimates on an adjusted basis.
Encompass Health Corporation (NYSE:EHC) disclosed EPS of $0.97 for the first quarter, outperforming estimates by $0.05. The company’s revenue of $1.33 billion for the quarter also beat analysts’ forecasts by $8.7 million.
A total of 48 hedge funds were invested in Encompass Health Corporation (NYSE:EHC) at the end of the first quarter, with $1.14 billion in collective stakes. This shows improving investor confidence over the previous quarter, where 40 hedge funds reported long bets on the company shares.
Heartland Advisors, an investment management firm, talked about the prospects of Encompass Health Corporation (NYSE:EHC) in its Q4 2021 investor letter. Here’s what the fund said:
“COVID complications. Shares of many Health Care companies lagged as the continuing threat of COVID-19 dampened demand for elective medical procedures and health care providers struggled to maintain adequate staffing in the face of burnout and resistance to vaccine mandates. The Strategy’s holdings in the sector trailed the benchmark average, and the group contained a key detractor, Encompass Health Corporation (EHC).
Encompass provides inpatient rehabilitation services as well as home-based health and hospice care. Both businesses enjoy a competitive advantage over many of their peers and, we believe, are well positioned to grow organically, and acquire smaller competitors that could further economies of scale.
A labor shortage has taken a toll on sales and profit margins at Encompass as the company struggles to fill positions in a challenging environment for nursing wages and availability. Revenues have also been hurt by a slowdown in elective surgeries performed, which results in a smaller pool of patients in need of rehabilitation services.
When we took a stake in Encompass late in the summer of 2020, we recognized that COVID-related headwinds could endure longer than anticipated. However, the team believes the current challenges will eventually fade as enhanced nurse recruiting outreach helps mitigate staffing pressures while COVID-19 containment and treatment efforts gain traction. With shares producing an 8% free cash flow yield and trading at just 9x 2022 enterprise value/earnings before interest, taxes, depreciation, and amortization, we believe our patience will be rewarded.”
You can also take a look at 15 Best Undervalued Stocks to Buy Now and 10 Biggest Quant Funds in The World.
