The stock market remains a challenging environment with rising interest rates and strong headwinds. So far, the economy has been stable enough that earnings growth hasn’t contracted, but it’s unlikely to stay that way the longer the Fed remains aggressive. This article discusses characteristics of stocks likely to outperform and three stocks with these characteristics: Lockheed Martin (LMT), Vertex Pharmaceuticals (VRTX), and Elevance Health (ELV).
The stock market plunged lower after the FOMC press conference where Chairman Powell made clear that even if the Fed were to slow the pace of rate hikes, the work is far from done. This led to estimates of the terminal rate of this walking cycle increasing by 5.5% after the meeting, now the consensus.
Of course, the higher the ending percentage, the more pain will be inflicted on the economy, especially in areas like finance, housing and real estate. Bonds are likely to suffer, and there is a higher chance of liquidation if borrowers fail to meet their obligations, which becomes more likely in a high interest rate world. Stocks will also suffer, which could increase if earnings fall significantly.
These environments mean that investors need to be extremely judicious in making their selections. They should look for stocks whose prospects are independent of short-term economic or monetary factors.
Lockheed Martin (LMT)
LMT is a security and aerospace company with four segments: Aviation; missiles and fire control; rotating and mission systems; and Space. The company produces high-tech weapons and defense systems, but is best known for its F-35 fighter jets. In addition to these services, LMT provides a wide range of services for governments around the world.
In terms of the current environment, LMT is an ideal selection to “beat” the bear market. First, government budgets and defense spending are much less volatile than other parts of the economy. In fact, at the global level, defense spending has grown at about 5% per year for the past several decades, the only dip being during the dissolution of the Soviet Union in the early 1990s.
Second, companies like LMT often get long-term contracts and have only a few competitors, as these projects are quite advanced and require security clearance. They also often have large balance sheets and a long history of paying and raising dividends, which also leads to outperformance during periods of economic turbulence.
LMT has an overall B rating, which translates to a Buy in our POWR Rating system. B-rated stocks have posted an average annual performance of 20.1%, which compares favorably with the S&P 500’s annual performance of 8.0%.
In terms of component qualities, LMT has a B value due to its forward P/E of 14, which is cheaper than the S&P 500 (and less prone to negative revisions). It also has a B for quality for being one of the leading aerospace and defense companies. Click here to see more of LMT’s POWR Ratings.
Vertex Pharmaceuticals (VRTX)
VRTX discovers and develops small molecule drugs for the treatment of serious diseases. The leading drugs are Kalydeco, Orkambi, Symdeko and Trikafta for cystic fibrosis, where Vertex therapies remain the standard of care worldwide. The company also focuses on developing treatments for pain, type 1 diabetes, inflammatory diseases, influenza and other rare diseases.
The company’s cystic fibrosis drugs are poised to continue to dominate the market for the foreseeable future due to the drugs’ disease-modifying potential, consistent patient use, and very little competition. VRTX combination therapies also have long-standing patents, protecting its cystic fibrosis portfolio from generics. There is also potential for its non-cystic fibrosis pipeline, which is exposed in promising areas such as AAT deficiency, sickle cell disease and beta thalassemia.
VRTX has an overall rating of A, which equates to a strong buy rating in the POWR Ratings service. A-rated stocks have posted an average annual performance of 31.1%, which compares favorably with the S&P 500’s average annual gain of 8.0%.
VRTX also has strong component scores, including an A for quality, as 11 out of 19 analysts have a Strong Buy rating on the stock and only 2 a Sell rating. It is also considered one of the top companies in the space due to its dominance of the CF market and strong pipeline of potential blockbuster treatments. Click here to see more of VRTX’s POWR Ratings.
Altitude Health (ELV)
ELV is a managed care company that provides medical benefits to approximately 44 million members. The company offers employer, individual, and government-sponsored coverage plans. It is also the largest provider of Blue Cross Blue Shield coverage. This sector has also been particularly strong due to a very low unemployment rate, meaning the company has seen strong growth in enrollment.
Furthermore, the pandemic boosted the bottom line as fewer people went to the doctor and underwent procedures. Therefore, the company’s payout ratio dropped. Many analysts had expected above-average readings as the economy normalized, but so far this has simply returned to pre-pandemic levels.
Another reason to love managed care stocks is their pricing power, as health care spending tends to grow faster than inflation. And they are generally less affected by economic slowdowns. Currently, the company is seeing growth in its Medicare Advantage plans and virtual care services.
With these attributes it is not surprising that ELV has an overall rating of A, which translates into a Strong Buy rating in our POWR ratings system.
LMT shares. Year-to-date, the LMT is up 38.22%, versus a -19.84% gain in the benchmark S&P 500 index over the same period.
About the author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR growth and POWR Shares Below $10 newsletters. Read more about Jaimini’s background, along with links to his most recent articles.
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