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What are we looking for?

U.S. consumer defensive and health care stocks with attractive valuations and better than average dividend income amid a bear market.

The broad S&P 500 index remains in bear market territory, down more than 20 per cent year-to-date. U.S. inflation is currently at a level not seen since the early 1980s, which has put pressure on global equity markets.

Defensive sectors such as health care, consumer staples and utilities tend to hold up well in bear markets because of the dividend income and stability they offer. This week, we dug into the consumer defensive and health care sectors to see which companies look interesting from a value and income perspective.

The screen

Using Strategy Builder, our stock screener, we begin by setting a minimum market cap threshold of US$10-billion in order to find well established names with large capitalizations, which tend to have less risk and volatility than small-cap stocks.

Next, we will select only stocks with price-to-earnings ratios at or below the current P/E of the S&P 500 index, which sits at 18.4. We were also interested in companies with a dividend yield above the average 2.2 per cent currently indicated for the S&P 500, so we can be paid to wait during this bear market for an eventual rebound.

We have also included year-to-date and one-year returns for reference.

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Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options, and commodities.

What we found

U.S. consumer defensive and health care stocks with attractive valuations

1Merck & Co. Inc.MRK-NDrug Manufacturers214.112.93.310.017.386.18
2Bunge Ltd.BG-NConsumer Packaged Gds.
3Kellogg Co.K-NConsumer Packaged Gds.24.816.83.212.715.373.55
4General Mills Inc.GIS-NConsumer Packaged Gds.47.618.02.718.533.080.62
5Philip Morris Int'lPM-NTobacco Products149.516.55.30.7-4.195.85
6Molson Coors Bev.TAP-NBeverages - Alcoholic10.714.
7Kroger Co.KR-NRetail - Defensive32.413.
8Pfizer Inc.PFE-NDrug Manufacturers246.58.53.6-22.5-0.144.28
9Tyson Foods Inc.TSN-NConsumer Packaged Gds.
10Walgreens BootsWBA-QHealth Care Providers/Svcs.
11Viatris Inc.VTRS-QDrug Manufacturers11.014.35.3-36.4-31.88.85
12Target Corp.TGT-NRetail - Defensive73.218.02.7-31.4-34.2155.51

Source: Trading Central

Topping our list is global health care giant Merck & Co., which provides medicines, vaccines and animal health products. The company has the second-highest market cap on our list at US$214.1-billion. The company’s stock price has been quite stable over the past year, with a gain of 10 per cent year-to-date and 17.3 per cent over one year, making it one of the best performing stocks on our list. The stock has a current P/E of 12.9 and a dividend yield of 3.3 per cent.

Target Corp., a general merchandise and food retailer, just announced plans to hire an additional 100,000 workers for the holiday season as the company plans to sell holiday merchandise earlier than in previous years as the company is predicting shoppers will spend early to avoid higher costs closer to year-end owing to inflation pressures. The stock has a current P/E of 18 and a dividend yield of 2.7. Looking at stock performance, the stock price is down 34.2 per cent over one year, the largest decliner on our list over that period, which might be of some value to bargain hunters.

Walgreens Boots Alliance Inc., a holding company in the U.S. that operates a chain of pharmacies and various retail stores, has the lowest P/E on our list at just 5.7, and the highest dividend yield, 5.7 per cent. The stock just posted a new 12-month low.

Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a three-year historical period with quarterly rebalancing, the screen described outperformed the benchmark with a 50-per-cent cumulative total return, compared with 31 per cent for the S&P 500. Looking back over one year amid the most recent market downturn, the above strategy had a 17-per-cent total return compared with a loss of 13 per cent for the S&P 500.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.

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