Investing

5 Undervalued Defensive Stocks Not Receiving Enough Credit for a Post-Coronavirus Recovery

Jon C. Ogg

Published: July 9, 2020 10:59 am

Last Updated: July 9, 2020 3:59 pm

Defensive stocks were investors’ best friends during any sell-offs and periods of uncertainty before the coronavirus turned into the COVID-19 pandemic. Suddenly, even the most defensive stocks found that they were less defensive than previously thought, after their supply chains were disrupted and millions upon millions of Americans and international buyers went from being financially sound to depending on the government.

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Most defensive stocks traditionally have paid strong dividends and were tied into sectors such as consumer products and staples, food and beverages, tobacco, big pharma, alcohol, utilities and so on. Now the dividend comparison is not even as strong as it used to be. In a COVID-19 world, all the attention has gone toward the “new immune” tech leaders that dominate the cloud or that have replaced many of the traditional brick-and-mortar goods and services companies that have been compromised in the recession.

24/7 Wall St. has identified five defensive stocks that still have a long way to go before returning to their former highs. All have had some reasons for selling off, but all have at least some positive issues that are not fully reflected in the shares or that seem to be given a discount versus peers.

One issue that is of course difficult to offer is future earnings valuations, due to the extreme scenario the economy is in. In this instance, any reference to normalized earnings would be a blend of 2019 earnings (pre-coronavirus) and future consensus expectations for when things are normal again. We have used Refinitiv for consensus analyst price target data and offered other color as well.

Another aspect of the coronavirus and a return to normality is that what used to be normal might not feel all that normal for quite some time. What has to be considered is that companies will still endure, they will still find ways to remain relevant as they have in the past, and they will try to generate strong profits and reward shareholders again. Just don’t expect that to be the case in 2020, with earnings power looking greatly diminished.

Here are five defensive stocks that must see much improvement before they are deemed expensive or fully valued again.

Coca-Cola

Coming into 2020, Coca-Cola Co. (NYSE: KO) was looking great, with a technical set-up that seemed like it would have an explosive move higher. Then came the coronavirus, and it ran into troubles in the operations in China, with so many shutdowns.

With shares still close to $45, and with multiple investments in outside companies for beverages, Coca-Cola probably should start to be considered a defensive stock again.

With a 52-week high of $60.13 and a $52.32 consensus target price, Coca-Cola just hasn’t found any love from Wall Street, despite its move away from sugar water over the past decade. The beverage giant also comes with a 3.6% dividend yield and is valued at about 22 times normalized earnings.

Dollar Tree

As a dollar store, Dollar Tree Inc. (NASDAQ: DLTR) is in a defensive retail space. Even with Family Dollar stores, it is still worth less than half of rival Dollar General, despite having about 85% of the revenues in comparison. Investors have been concerned about it having more leverage and a less solid earnings report path, but the most recent report was strong enough that investors should start looking at its long-term optionality, rather than its rival having grown so much.

Dollar Tree does not pay a dividend, but the dollar store theme should be alive and well, considering the recession and the ability to “reach up” into higher-priced categories.

At $91 or so a share, Dollar Tree has a 52-week range of $60.20 to $119.71 and a consensus target price of $104.48. Its shares are still handily lower than at the start of 2018.

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Essential Utilities

Essential Utilities Inc. (NYSE: WTRG) is the former Aqua America, and its acquisition of Peoples Gas in Pennsylvania was perhaps very unlucky in the timing. Now it is a water utility and a natural gas utility, and the market has had a hard time figuring out how to value it, despite the premium multiples in other water utilities.

At almost $43 a share, it has a 52-week range of $30.40 to $54.54 and a consensus target price of $48.20. It also has a 2.2% dividend yield, despite being valued at about 25 times normalized forward earnings. The $10 billion market cap also keeps this one in the “approachable” category for future mergers, now that so many other utilities dwarf it in size.

Molson Coors

In recent years, Molson Coors Beverage Co. (NYSE: TAP) has seen its shares slide and slide, and its beer-related earnings power is considered very weak. With shares now near $34, and with a 52-week range of $33.55 to $61.94, note that it was a $100 stock less than five years ago. That means much of the slide was beer-related long before the coronavirus arrived.

There is no dividend to fall back on now that it has been suspended, but the valuation is probably close to 10 times normalized earnings, a much lower level than before. With so many bars and restaurants closed, beer and alcohol sellers are having to depend on people being stuck at home.

Shares of Molson Coors reflect no price recovery at all since the March panic-selling lows, and that seems at least somewhat unfair. What share price this stock settles in at remains a mystery, but long-term investors who can look beyond the woes of 2020 can imagine the return of something close to normality, and even an ultimate return to paying a dividend.

Pfizer

Pfizer Inc. (NYSE: PFE) is about as boring as it gets in big pharma and many investors believe the wait will just be too long to bother with. A restructuring and spin-off will not be complete for another year or so, but at $33.75 a share, and with a 52-week range of $27.88 to $43.56, it seems that the bad news, or the long slow road to nowhere, may be priced in along with now offering a 4.5% dividend yield.

Pfizer’s consensus target price of $40.04 and a valuation of about 11 times normalized earnings ought to be impressive enough, but independent research firm Argus just updated its coverage in the COVID-19 fight and it sees as much as 60% upside for Pfizer.

This was a $46 stock in late 2018, and the share price is basically the same as it was before the major recovery was seen elsewhere.