Jefferies Recommends These 6 Defensive Stocks Amid Recession and Inflation

Published on July 19, 2022 at 9:09 am by Omer Farooq in Hedge Funds, News

In this article, we will look at the 6 defensive stocks Jefferies’ analysts are recommending amid recession and inflation. If you want to explore similar stocks, you can also read Jefferies Recommends These 3 Defensive Stocks Amid Recession and Inflation.

The Fed Hinting At Another Rate Hike

On June 15, the Fed issued a 75 basis point rate hike, the most aggressive rate hike since 1994, and brought its benchmark fund’s rate to a range between 1.5% and 1.75%. Fed officials are warning of another 75 basis point hike this month, at the next FOMC meeting that is scheduled on July 26. An additional 75 basis point hike will bring the Fed’s benchmark fund’s rate to a range between 2.25% and 2.5%, which, according to Fed governor Christopher Waller, is a neutral rate and will neither stimulate nor constrict demand.

Inflation Hitting Record Highs

On July 13, The Bureau of Labor Statistics released the Consumer Price Index summary for June 2022 in which they reported that the CPI for all urban consumers rose by 1.3% year over year in the month of June and that the all items index rose 9.1% year over year, the highest it has risen since November 1981. The all items less food and energy index rose 5.9% year over year and the energy index registered a 41.6% year over year increase, the highest index rise since April 1980. The food index rose by 10.4% year over year, which marks the largest 12-month increase since February 1981.

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Billionaire Stanley Druckenmiller Predicts Recession

Stanley Druckenmiller, a veteran hedge fund manager and investor, recently spoke at the 2022 Sohn Conference and put forth his view on the current economic situation and also weighed in on the chances of a recession. Mr. Druckenmiller noted that the inflation rate is higher than he initially expected and that he was surprised at how slow the Fed was to recognize the inflation problem, which came as fairly straightforward to him. He said:

“I thought they were slow in not recognizing the problem in April ’21, and they were still buying bonds in March of ’22, and they were still not pivoting verbally until November (’21)- I think that period was incredibly costly because a lot of assets were purchased during that period that I think a lot of people moving out the risk curve will lose a lot of money on…”

Asked whether he sees it being a “soft landing” or a “hard landing”, Mr. Druckenmiller responded with his analysis backed by historical bear markets he has lived through. He said that the chances of this bear market being a soft landing, that is the economy not going into a recession, are relatively slim and referred to points in history when the U.S. stock market fell into the bear market territory, and also noted that he sees more chances of a recession. Mr. Druckenmiller pointed out:

“We have never had a soft landing after inflation’s gotten above 4 and a half percent and the situation we face now is extraordinary, where the Fed… we are at 75 basis points now and I can’t keep up but even the projections of 2 percent, you are so far behind the inflation rate and there is so much wood to chop and there’s been such a broad asset bubble going into it, it’s very hard for me to say that the probabilities favor a soft landing indeed I think they aggressively point to a hard landing…”

Mr. Druckenmiller backed his view on the chances of the U.S. economy entering a recession by noting that once inflation rises above roughly 5%, it has never, in history, been tamed without the Fed’s benchmark fund’s rate being risen to above the CPI. He pointed out that an inflation rate of roughly 8%, which it was in May 2022, would call for the Fed’s fund’s rate to rise to 9%. Mr. Druckenmiller sees the economy entering a recession somewhere in 2023, and here are the reasons he gave for his prediction:

“I think history is gonna win. Once inflation gets about five percent, it’s never come down without a recession and I think a recession is in the cards, I just don’t know when. We have about, depending on who you listen to, a trillion and a half to two trillion of excess savings now, so it may take some time to work through that savings but given the extent of the asset bubble and the destruction in the markets, given what’s going on in Ukraine, given the zero-Covid policy in China, I don’t take a lot of comfort from that. I assume we’re going to have a recession sometime in ’23, I just don’t know whether it’s going to be in the early part or the later part…”

Analysts Are Unveiling Their Top Defensive Picks

With the ongoing battle between inflation and the Fed’s rate hikes, the stock market is in turmoil. As of July 15, the S&P 500 is down 20.26% year-to-date, the Dow Jones Industrial Average has lost 15.32% since January 1, and the tech-heavy Nasdaq Composite is down 28.44% since the beginning of 2022. Some of the biggest losers of 2022 that have lost more than 20% year-to-date as of July 15 include Meta Platforms, Inc. (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOG).

Our Methodology

Financial analysts, investors, and investment advisors are working on identifying companies that demonstrate resilience to inflation, and a possible recession. On July 2, Jefferies’ analysts unveiled their defensive stock portfolio which contains stocks they are recommending to investors in a tough economic situation. In this article, we will be discussing these stocks in detail.

Best Defensive Stocks to Buy Now According to Jefferies

6. Light & Wonder Inc. (NASDAQ:LNW)

Number of Hedge Fund Holders: N/A

Light & Wonder, Inc. (NASDAQ:LNW) develops technology-based products and services, and related content for the gaming, lottery, social and digital gaming industries in the United States and internationally. Jefferies analysts are recommending the gaming stock to investors as they remain bullish on the company’s cash flow, which as of July 14 stands at $477 million, and believe that the company can allocate this cash flow to further buybacks and M&A activity.

On May 10, Light & Wonder Inc. (NASDAQ:LNW) announced that it has acquired Playzdo, a provider of content creation platforms and games, and said that with this move the company has expanded its iGaming content capacity.

Analysts other than those at Jefferies are bullish on Light & Wonder Inc. (NASDAQ:LNW) as well. On July 14, Deutsche Bank analyst Carlo Santarelli trimmed his price target on Light & Wonder Inc. (NASDAQ:LNW) to $48 from $53 and reiterated a Hold rating on the shares.

As of March 31, Fine Capital Partners is the most bullish hedge fund on Light & Wonder Inc. (NASDAQ:LNW) and owns over 9.4 million shares of the company. The fund’s stakes are valued at $553.40 million and the investment covers 96.61% of its 13F portfolio.

5. Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH)

Number of Hedge Fund Holders: 15

Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) develops, operates, and franchises fine dining restaurants under Ruth’s Chris Steak House. Jefferies’ analysts are recommending this defensive stock to investors in a recessionary environment. At the close of Q1 2022, 15 hedge funds were long Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) and held stakes worth $116.33 million in the company. This is compared to 15 positions a quarter ago with stakes worth $96.44 million.

Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) is offering dividends and is also trading at a bargain right now. As of July 14, the stock has a trailing-twelve-month PE ratio of 12.31 and a forward dividend yield of 3.61%. The company also has $42.37 million in free cash flows.

As of the first quarter of 2022, Hill Path Capital is the most prominent shareholder in Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) and owns over 2.73 million shares of the company. The fund’s stakes were valued at $62.59 million, which covers 2.38% of its 13F portfolio.

While some stocks like Meta Platforms, Inc. (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOG) have cyclical business models, other stocks like Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) are exhibiting defensive properties and are more resilient to inflation and rising interest rates.

4. Altria Group, Inc. (NYSE:MO)

Number of Hedge Fund Holders: 47

Altria Group, Inc. (NYSE:MO), a leading tobacco company that is most widely known for its Marlboro brand, is another top defensive stock pick of Jefferies. This July, Altria Group, Inc. (NYSE:MO) announced that it has raised cigarette prices to fuel Q3 profitability. The company said that it is raising prices on all of its brands by $1.50 per carton, effective on and after July 17. The company also has a strong dividend yield of 8.51% as of July 14 and also has excess free cash flows of $8.25 billion to support it.

In addition to Jefferies analysts, other analysts are also bullish on Altria Group, Inc. (NYSE:MO). On July 1, Deutsche Bank analyst Gerry Gallagher trimmed his price target on Altria Group, Inc. (NYSE:MO) to $46 from $60 and reiterated a Buy rating on the shares.

The hedge fund sentiment around Altria Group, Inc. (NYSE:MO) is positive. At the close of Q1 2022, 47 hedge funds held stakes in Altria Group, Inc. (NYSE:MO) worth $1.95 billion. This is compared to 39 positions in the previous quarter with stakes of $1.05 billion.

As of June 30, P.A.W. CAPITAL PARTNERS is the largest shareholder in Altria Group, Inc. (NYSE:MO) with stakes worth $835 million in the company. The investment covers 1.21% of the fund’s 13F portfolio.

Unlike stocks that underperform in bear markets such as Meta Platforms, Inc. (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOG), Altria Group, Inc. (NYSE:MO) is a defensive stock that has a track record for driving outperformance during tough economic conditions.

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