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Spreadsheet
After last week’s Halloween horror show called megatech earnings (i.e. Amazon, Meta et al), investors are looking for something different. Some safe stocks. That refuge is defensive stocks: predictable, boring and safe stocks that pay limited but predictable returns in a time of volatility. We’re talking industrials, American health care and Canadian banks. Here are some ideas:
Honeywell International (HON-N)
This conglomerate has its fingers in many pies: aerospace (i.e. engines, navigation systems and aircraft lighting); building controls (e.g. climate controls, video surveillance and lighting sensors); household goods (think humidifiers); and gas detection equipment and personal protection equipment. However, it’s Honeywell‘s aerospace operation, amounting to roughly a third of its overall business, that attracts investors, given how air travel has awoken from its Covid coma. Just witness recent quarters by United Air and Delta, announcing how strong demand is, even rivaling 2019 levels.
Honeywell has held up well this year, down only 4% compared to the Nasdaq’s -30%, which makes this a fairly safe stock. For the most part, HON stock has been rangebound between $170 and $200 and currently is riding the market upswing and returning to $200. It could break this level and return to its 52-week high of $228.26 as the market enters a historically strong period, given the U.S. midterm election which typically rises after that vote. In the meantime, shareholders are paid a 2.1% dividend as it trades at a 27x PE though Honeywell’s forward PE of 20.24x is more inline with the company’s historic average. (A caveat, but not a dealbreaker.)
The company reported its Q3 last week and impressed the street. Year-over-year, revenues rose 9%, the topline climbed 5.6%, the bottom 11.4%, organic sales rose 9% while free cash flow jumped 100%. Traders and investors can take a position now. Buying a dip would be better, but the macro direction points upward rather than towards volatility. Mind you, this is 2022, the year of choppiness.
Merck & Company (MRK-N)
U.S. health care is a profitable segment of the stock market that has many safe stocks. After all, there will always be demand for drugs and surgeries, especially as the baby boomers age. Merck is definitely on an uptrend, breaking past $100 as October ends to establish new 52-week highs. The stock’s catalyst was its sterling Q3 report last week where it beat earnings and revenues and upgraded its forecast. Year-over-year, earnings were up 4% (7% if you exclude the impact of the strong USD) and revenues rose 14% (18% considering currency). Drivers were strong sales of Merck’s cancer drugs and many vaccines. The pharmaceutical side boasted a 13% hike in sales YOY. Merck’s key drug, Keytruda, saw sales jump 20%. One of the new weaknesses in Merck was its animal health business where the strong greenback depressed sales by 3%.
Nonetheless, MRK stock modestly raised its guidance from $57.5-58.0 billion in 2022 revenues to $58.5-59.0 billion. Note: These revisions account for the 4% negative impact of currency conversions (that pesky U.S. dollar again).
Other notes: MRK stock pays a safe 2.82% dividend yield and trades at a very low bet of 0.33 and PE of 6.55x. This safe stock offers you stability, safety and a positive outlook. The question now becomes how much further it will rise, since shares have jumped from $87 to $100 in October alone.
BMO Aggregate Bond Index (ZAG-T)
As yields rise—and will continue to—it’s worth considering this stodgy, boring corner of the market called bonds. While bonds won’t make you rich overnight, they won’t plummet like the Metas of the world. Given the vast universe of Canadian bonds, a simple way to invest in domestic fixed income in one shot is through ETFs like ZAG. This basket mostly holds bonds with 6-8-year duration. Shorter duration offers less volatility, but the worst of the bond market is likely behind us.
ZAG has trended down for much of this year, from a high of $15.84 to $12.95, but this ETF has been climbing of late. Meanwhile, you’re paid a safe 3.55% dividend to wait and paying only 0.09% in MER. The beta is 1.01.
