4 Stocks to Buy for Protection From an Evergrande-Driven Correction
The global equity markets already had a knee-jerk reaction on the possibility of an Evergrande (OTCMKTS:EGRNF) crisis spillover. There’s reason to worry when a company with $300 billion in debt faces potential bankruptcy. As a precaution, it may be wise to looks for stocks to buy across sectors that have a low beta.
It’s also important to mention here that strategists from UBS and Citi believe that the crisis is unlikely to be China’s “Lehman moment.” Therefore, broad based panic selling is unlikely. However, markets seem poised for some healthy correction.
In the U.S., the Federal Reserve is likely to begin tapering towards the end of the year. The Fed has been communicative, and this factor might largely be discounted in the stock. However, with relatively liquidity tightening, there might be some volatility in the markets.
Therefore, with these two factors in consideration, let’s talk about four low beta stocks that can be added to the portfolio. In addition to low volatility, these stocks also offer a healthy dividend yield.
Stocks to Buy: Walmart (WMT)
With expected correction and volatility in the markets, WMT stock is among the top stocks to buy. The stock has a low beta and an attractive dividend yield of 2.2%. WMT stock has been sideways for almost 12 months. A upside seems impending with positive business developments.
Recently, Deutsche Bank estimated that Walmart+ is gaining momentum and has potentially reached 32 million subscribers. The bank also believes that subscriber growth has reached an inflection point. As subscribers continue to swell for the grocery division, cash flow upside is likely to be supported. Deutsche Bank has a price target of $185 for the stock. This would imply an upside potential of about 30% from current levels.
Walmart has also pursued an aggressive omni-channel growth strategy, which has helped in boosting comparable store sales. For the current year, the company expects global e-commerce revenue of $75 billion.
An important point to note is that personal consumption expenditure is a key economic driver in the U.S., with retail spending an important part of that. With the holiday season approaching, sales are likely to remain strong. These factors make WMT stock an attractive buy at current levels.
Altria (MO)
MO stock has remained sideways in the last six months. However, there are plenty of reasons to buy the stock at current levels. First, MO stock has a low beta, which is a key screener when the market is expected to be volatile.
Further, the stock trades at a forward price-earnings-ratio of 10.4. At these valuations, the downside risk seems minimal. One must not forget that MO stock is a dividend champion. Even in a phase of business transformation, Altria increased quarterly dividends by 5% to 90 cents. Currently, the stock offers a dividend yield of 7.1% and dividends are sustainable.
For the first half of 2021, Altria reported revenue growth of 3.8% to $10.5 billion. However, revenue for the second quarter was 10.9% higher than a year ago. Altria continues to make investments in smoke-free products. At the same time, the core tobacco business remains the cash cow.
Altria also has 45% stake in Cronos (NASDAQ:CRON). If cannabis is legalized at the federal level, this investment can deliver value. Overall, MO stock seems undervalued and is a quality name among income stocks. With uncertainties related to the broader market, the stock is worth holding in the portfolio.
Stocks to Buy: AstraZeneca (AZN)
In general, pharmaceutical stocks have a low beta and AZN stock is no exception. The stock also looks attractive at a forward P/E of 14.9 and offers a dividend yield of 2.3%.
AstraZeneca has 160 projects in the pipeline. This includes 13 new molecular entities in the late-stage pipeline. Overall, there are 22 products in the late-stage pipeline.
The key point here is that the company’s pipeline provides a multi-year growth visibility. This is one reason to consider AZN stock even for the long-term portfolio.
For the first half of 2021, AstraZeneca reported revenue growth of 18%. Excluding the impact of the Covid-19 vaccine, growth was healthy at 9%. New medicines had an incremental impact of $1.7 billion in the first half of the year. This factor is likely to remain the growth and cash flow driver.
AstraZeneca also has strong presence in emerging markets. For the first half of the year, revenue growth in emerging markets was 21%. Excluding China, growth was more robust at 36%. There seems to be ample headroom for penetration in emerging markets, which is another key growth driver for the company.
AZN stock therefore looks attractive with a low beta, growth visibility and healthy cash flows that will support dividend upside.
British American Tobacco (BTI)
For income investors seeking a robust dividend yield, BTI stock is worth considering with its yield of nearly 8%. Of course, the stock has a low beta, which will protect from capital erosion. At the same time, the stock seems significantly undervalued at a forward P/E of 8.2.
British American has also been pursuing a business portfolio revamp with focus on non-combustible products. This new segment has witnessed strong momentum with revenue growth of 50% for the first half of 2021. The company already has 16.1 million non-combustible product customers.
Even on a group basis, the company’s top-line growth for the first half of the year was 8.1%. For the same period, adjusted diluted EPS increased by 6.1%. Clearly, the stock seems undervalued at 8.2x forward earnings.
Even with strong growth in the non-combustible business, the combustibles remain the cash flow driver. For the first half of 2021, combustibles volume was up 1.5%, driven by cigarette volume share gains. In particular, emerging markets like Bangladesh, Pakistan, Vietnam, Brazil and South Africa supported growth.
Overall, the portfolio transition for British American seems to be heading in the right direction. The combustible segment also continues to deliver cash flows, which will help in sustaining dividends.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
