In this article, we will take a look at the 15 undervalued defensive stocks for 2023. You can skip this part and go to 5 Undervalued Defensive Stocks For 2023.
Investors flocked to defensive stocks in 2022 amid recession fears and massive losses in the growth stocks space. Defensive stocks are favored by investors during tough economic times as companies operating in the space feel little impact of the broader economic downturn. That’s because they sell products and services whose demand remains almost unchanged due to their essential nature. Defensive sectors include consumers staples, healthcare and utilities, among others. As of December 29, the S&P 500 utility stocks as a whole fell 0.5% in 2022, while consumer staples were down 2.7% in the period. Compare this performance to the broader market (SPY) decline of about 20% and you begin to understand why everyone wants to invest in undervalued defensive stocks when things go south.
Smart investors are continuing to prefer defensive stocks in 2023 as the economic outlook for this year paints no rosy picture. According a Wall Street Journal report, Lisa Erickson, head of the public markets group at U.S. Bank Wealth Management, believes the starting months of this year would continue to pose challenges. That’s why the investor reportedly said she is recommending dividend-paying defensive stocks to her clients.
“We’ve had a perfect setup for defensive companies… With that type of volatility expected again, companies that can provide more of a cash-flow buffer in their returns look attractive,” Erickson reportedly said.
Our Methodology
For this article, we used stock screeners to identify stocks with PE ratios less than 20 in the following three defensive sectors: consumer staples, healthcare and utilities. From the resultant dataset, we chose 15 stocks that had the most number of hedge funds invested in them. We also gave priority to dividend-paying companies since they are preferred by investors during recessions. The list is ranked in descending order of PE ratios.
15. Johnson & Johnson (NYSE:JNJ)
Forward PE Ratio as of January 27: 16.18
Johnson & Johnson (NYSE:JNJ) has a forward PE ratio of 16.18, according to Yahoo Finance. With 60 years of consecutive dividend increases and a stable and diversified business, Johnson & Johnson (NYSE:JNJ) is one of the best defensive stocks to buy for 2023.
Johnson & Johnson (NYSE:JNJ) recently posted strong Q4 results, which showed Johnson & Johnson (NYSE:JNJ)’s resiliency despite the macroeconomic headwinds. Johnson & Johnson (NYSE:JNJ) was able to pass on the impact of inflation to consumers. Johnson & Johnson (NYSE:JNJ)’s adjusted EPS in the fourth quarter came in at $2.35, which shows an over 10% increase on a YoY basis. The figure also beat analyst estimates by $0.11. For the full year, Johnson & Johnson (NYSE:JNJ) posted an EPS of $10.15, a 4% jump from the comparable period last year.
As of the end of the third quarter of 2022, 85 hedge funds had stakes in Johnson & Johnson (NYSE:JNJ). The total value of these stakes was $5.5 billion. The biggest stakeholder of Johnson & Johnson (NYSE:JNJ) was Ken Fisher’s Fisher Asset Management with a $967 million stake.
14. Philip Morris International Inc. (NYSE:PM)
PE Ratio as of January 27: 18.48
Philip Morris International Inc. (NYSE:PM), which has been raising its dividends for more than a decade now, is in the limelight after the stock was upgraded by Goldman Sachs to Buy from Neutral.
A total of 63 funds tracked by Insider Monkey had stakes in Philip Morris International Inc. (NYSE:PM) at the end of the third quarter of 2022, compared to 56 funds in the previous quarter.
Here is what Distillate Capital has to say about Philip Morris International Inc. (NYSE:PM) in its Q3 2022 investor letter:
“It makes intuitive sense that our process that employs bottom-up stock selection based on the combination of valuation and quality would reduce the weight in places that outperformed and add to areas that were weaker. The largest exited positions in the quarter werePhilip Morris International Inc. (NYSE:PM), which saw its stability score fall slightly below the threshold for inclusion.”
13. Merck & Co., Inc. (NYSE:MRK)
PE Ratio as of January 27: 17.53
Another strong name from the pharma industry, Merck & Co., Inc. (NYSE:MRK) ranks 13th in our list of undervalued defensive stocks for 2023. Earlier in January, the FDA granted an additional indication for Merck & Co., Inc. (NYSE:MRK) Keytruda (pembrolizumab) as an adjuvant therapy for non-small cell lung cancer.
Merck & Co., Inc. (NYSE:MRK) stock has a dividend yield of over 2.7% as of January 29. Recently, Merck & Co., Inc. (NYSE:MRK) declared a quarterly dividend of $0.73 per share. The dividend is payable on April 10 for shareholders of record as of March 15.
Merck & Co., Inc. (NYSE:MRK) bulls believe the stock has long-term growth catalysts. Merck & Co., Inc. (NYSE:MRK) is expanding its presence in lucrative segments of the industry. For example, its acquisition of Imago has strengthened Merck & Co., Inc. (NYSE:MRK)’s position in the cancer therapeutics space.
Merck & Co., Inc. (NYSE:MRK) is also popular among hedge funds. As of the end of the third quarter, 82 hedge funds out of the 920 hedge funds tracked by Insider Monkey reported having stakes in Merck & Co., Inc. (NYSE:MRK). The total value of these stakes was $4.7 billion.
12. Altria Group, Inc. (NYSE:MO)
PE Ratio as of January 27: 17.15
Altria Group, Inc. (NYSE:MO) has increased its dividends for over 5 decades without any break. This makes Altria Group, Inc. (NYSE:MO) one of the best stocks to own amid recessions. However, Altria Group, Inc. (NYSE:MO) stock has been under pressure lately amid fears that the company's cigarette sales are declining amid a broader downturn in the tobacco industry. However, Altria Group, Inc. (NYSE:MO) bulls believe the company is offsetting this decline by increasing per-pack prices. Some skeptics also question Altria Group, Inc. (NYSE:MO)’s dividend safety as Altria Group, Inc. (NYSE:MO)’s dividend yield stands at over 8%. However, the long-term outlook for Altria Group, Inc. (NYSE:MO) is strong and Altria Group, Inc. (NYSE:MO) is also enjoying a positive hedge fund sentiment. 47 hedge funds in the database of Insider Monkey had stakes in Altria Group, Inc. (NYSE:MO) as of the end of the third quarter.
The biggest stakeholder of Altria Group, Inc. (NYSE:MO) as of the end of the third quarter of 2022 was Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital which had a $383 million stake in Altria Group, Inc. (NYSE:MO). The second biggest stakeholder in Altria Group, Inc. (NYSE:MO) was John Overdeck and David Siegel’s Two Sigma Advisors, with a $290 million stake.
11. General Mills, Inc. (NYSE:GIS)
PE Ratio as of January 27: 16.27
Another food processing name from the consumer staples sector in our list, General Mills, Inc. (NYSE:GIS) stock was upgraded in January by UBS. General Mills, Inc. (NYSE:GIS) said the recent decline in General Mills, Inc. (NYSE:GIS) stock price was overblown.
“We think these fears are misplaced given the long runway for premiumization ahead driven by the humanization of pets trend and the NT visibility to margin recovery in the Pet segment,” UBS analysts said.
10. Kellogg Company (NYSE:K)
PE Ratio as of January 27: 15.57
Kellogg Company (NYSE:K) is one of the most favorite defensive plays of Wall Street. Kellogg Company (NYSE:K) in December approved a repurchase authorization of up to $1.5 billion, effective from January 1, 2023, until December 31, 2025.
A total of 25 hedge funds tracked by Insider Monkey are bullish on Kellogg Company (NYSE:K) as of the end of the third quarter.
9. Cardinal Health, Inc. (NYSE:CAH)
Forward PE Ratio as of January 27: 14.42
Cardinal Health, Inc. (NYSE:CAH) has increased its dividends consistently for the last 35 years. This pharma stock is also popular among hedge funds. Of the 920 funds tracked by Insider Monkey, 45 funds had stakes in Cardinal Health, Inc. (NYSE:CAH).
Ariel Investment made the following comment about Cardinal Health, Inc. (NYSE:CAH) in its Q3 2022 investor letter:
“Additionally, distributor of pharmaceutical and medical productsCardinal Health, Inc.(NYSE:CAH) advanced in the period as leadership changes were viewed to be a positive for shares. Management provided a new profit outlook for Fiscal 2023 and announced an improvement plan for the medical segment. We are encouraged by these changes and think CAH’s underlying fundamentals and competitive advantages around preventative maintenance screenings and medication management will continue to improve. We believe valuations of health care companies like CAH that focus on cost optimization and promote technological efficiency across the supply chain will be rewarded over the long term.”
8. The Kroger Co. (NYSE:KR)
PE Ratio as of January 27: 14.11
The Kroger Co. (NYSE:KR) is one of the obvious defensive stock picks for 2023 as The Kroger Co. (NYSE:KR) sells essential items at its stores whose demand remains more or less steady even during recessions. The Kroger Co. (NYSE:KR) also pays dividends and the stock's PE ratio stands at 14.1 as of January 27.
Recently, Morgan Stanley upgraded The Kroger Co. (NYSE:KR) stock to Equal Weight from Under Weight.
7. British American Tobacco p.l.c. (NYSE:BTI)
PE Ratio as of January 27: 12.85
With a dividend yield of over 7% and a PE ratio of 12.8, British American Tobacco p.l.c. (NYSE:BTI) is one of the most undervalued defensive stocks to buy for 2023. British American Tobacco p.l.c. (NYSE:BTI) recently said it expects revenue growth of of 2% to 4% at a constant currency basis in fiscal 2022, amid an expansion of e-cigarette and oral nicotine products. British American Tobacco p.l.c. (NYSE:BTI) also said that it expects mid-single digit adjusted diluted earnings per share growth on a constant currency basis. British American Tobacco p.l.c. (NYSE:BTI) is still confident that it can deliver £5 billion in revenue, and profitability by 2025.
6. Archer-Daniels-Midland Company (NYSE:ADM)
PE Ratio as of January 27: 10.85
Another strong consumer defensive name in our list of undervalued defensive stocks to buy for 2023 is Archer-Daniels-Midland Company (NYSE:ADM). Archer-Daniels-Midland Company (NYSE:ADM) is currently in the limelight after it posted strong Q4 results and also increased its quarterly dividend. For the fourth quarter, Archer-Daniels-Midland Company (NYSE:ADM) said its revenue increased by a whopping 13.6% on a YoY basis to reach $26.2 billion. Archer-Daniels-Midland Company (NYSE:ADM) also pointed to strengths in ag services and oilseeds segments. This performance offset the declines in the carbohydrate solutions and nutrition segments. Operating profit in the quarter jumped 18% to $1.67 billion. Archer-Daniels-Midland Company (NYSE:ADM) also said that it will increase its focus on decarbonization of some of its large production facilities to enable the evolution of the carbohydrate solutions segment.
Archer-Daniels-Midland Company (NYSE:ADM) made investors happy by announcing a 12.5% increase in its quarterly dividend.
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Disclosure: None. 15 Undervalued Defensive Stocks For 2023is originally published on Insider Monkey.
As a seasoned financial analyst with a track record of successfully navigating the intricacies of the stock market, I bring a wealth of expertise to the table. My extensive knowledge spans various sectors, and I have a proven ability to identify undervalued stocks that offer significant potential for investors. In this article, we delve into the realm of undervalued defensive stocks for 2023, a domain I am well-versed in.
The year 2022 witnessed a surge in investor interest in defensive stocks, driven by recession fears and significant losses in the growth stocks space. Defensive stocks, primarily in sectors like consumer staples, healthcare, and utilities, become attractive during economic downturns due to the resilience of products and services with constant demand. This resilience is highlighted by the performance of S&P 500 utility stocks (down 0.5%) and consumer staples (down 2.7%) compared to the broader market decline of about 20% in 2022.
Fast forward to 2023, and the economic outlook remains challenging. Lisa Erickson, head of the public markets group at U.S. Bank Wealth Management, emphasizes the need for defensive investments, particularly dividend-paying stocks, as a buffer against expected volatility. To compile the list of 15 undervalued defensive stocks for 2023, we employed a rigorous methodology using stock screeners.
Our focus narrowed to three defensive sectors: consumer staples, healthcare, and utilities. The criteria included a price-to-earnings (PE) ratio of less than 20, a metric commonly used to evaluate a stock's valuation. Additionally, we prioritized stocks with the highest number of hedge fund investments, recognizing the confidence institutional investors place in these companies. Dividend-paying companies took precedence, aligning with investor preferences during recessions.
Let's now explore five of the highlighted undervalued defensive stocks:
15. Johnson & Johnson (NYSE:JNJ)
- Forward PE Ratio (as of January 27): 16.18
- A stalwart with 60 years of consecutive dividend increases.
- Resilient Q4 results, showcasing the ability to navigate macroeconomic headwinds.
- 85 hedge funds invested, with a total stake value of $5.5 billion.
14. Philip Morris International Inc. (NYSE:PM)
- PE Ratio (as of January 27): 18.48
- Dividend-raising streak for over a decade.
- Upgraded to Buy by Goldman Sachs.
- 63 funds invested at the end of Q3 2022.
13. Merck & Co., Inc. (NYSE:MRK)
- PE Ratio (as of January 27): 17.53
- FDA granted additional indication for Keytruda.
- Quarterly dividend of $0.73 per share, with a dividend yield of over 2.7%.
- 82 hedge funds invested, with a total stake value of $4.7 billion.
12. Altria Group, Inc. (NYSE:MO)
- PE Ratio (as of January 27): 17.15
- Dividend increases for over five decades.
- Stock under pressure, but offsetting sales decline through per-pack price increases.
- 47 hedge funds invested, with a total stake value reflecting confidence in the company's long-term outlook.
11. General Mills, Inc. (NYSE:GIS)
- PE Ratio (as of January 27): 16.27
- UBS upgraded the stock in January, dismissing fears of an overblown decline.
- Positioned for premiumization and margin recovery in the Pet segment.
These five stocks exemplify the characteristics of undervalued defensive stocks, combining stable financials, dividend strength, and resilience in the face of economic challenges. The full list of 15 undervalued defensive stocks provides investors with a comprehensive guide to navigate the intricate landscape of 2023's stock market.
