In this piece, we will take a look at the 10 best counter-cyclical and defensive stocks to invest in.

Volatility in the U.S. equity market is edging higher heading into year-end as investors react to a string of economic and geopolitical developments. Uncertainty over the outcome of the upcoming U.S. election is one headwind that is taking a significant toll on sentiments in the equity markets. Similarly, concern over a slowing economy crumbling amid high interest rates is also forcing investors to tweak their investment portfolios.

The damage has been done with the U.S. Federal Reserve expected to initiate a string of interest rate cuts in response to deteriorating economic conditions. The economy posting its weakest growth in the labor market in years is the earliest indication that things might not be well in the world’s largest economy.

READ ALSO: 10 Undervalued Cyclical Stocks to Buy According to Analysts and 10 Best US Stocks to Buy Under $5.

While the economy did bounce back in the second quarter, depicted by the gross domestic product growing by 2.8% compared to 1.6% in the first quarter, deterioration in the labor market is a concern forcing investors into stocks that won’t fall in a recession.

The economy added the lowest amount of jobs since 2021 in August, signaling that the economy is cooling after months of blockbuster gains. For starters, the Private sector payroll grew at the weakest pace, hiring just 99,000 workers.

A less-than-anticipated nonfarm payroll report for August contributed to the growing perception that the rate of employment expansion is slowing down. The Labor Department disclosed an increase in employment of 142,000, surpassing July but falling short of the 161,000 Dow Jones predictions.

Christopher Waller, a member of the Federal Reserve’s Board of Governors, did not outline a precise amount for the Fed’s reduction in interest rates or the exact timing that should support the economy. However, he expressed a willingness to consider the need for a forceful approach to maintaining employment levels while inflation approaches the Federal Reserve’s target of 2%.

Concerns over a slowing economy should continue sending jitters in the equity markets, as JPMorgan Chase Chief Jamie Dimon insists that stagflation could come into play even with the Fed cutting to try to boost economic growth. Stagflation could spell doom to the equity markets, especially cyclical stocks, whose performance depends on the economy’s health.

According to Dimon, inflationary pressures leading to higher deficits and increased infrastructure spending should continue to put more pressure on the economy as it tries to navigate the high interest rate environment. In August, the bank chief reiterated that there was a 35% to 40% chance of the economy plunging into recession.

Amid the recession concerns, pullbacks in the equity markets are more than expected, especially in September, billed as one of the worst months for stocks. Equity market valuation has already gotten out of hand after months of rallies fueled by the artificial intelligence frenzy and expectations of more than three interest rate cuts.

For investors looking to be on the front foot amid the expected pullbacks, the best counter-cyclical and defensive stocks to invest in could provide a way out. Counter-cyclical companies tend to do good when the economy is weak and suffer when business is booming, while non-cyclical stocks, or defensive stocks, stand out partly because economic conditions do not affect their core business. The fact that such companies mainly deal in goods and services that people cannot do without means they will always outperform with deteriorating economic conditions.

Lack of strength in the employment sector, changing expectations regarding the Federal Reserve’s forthcoming actions, concerns about a severe economic downturn, the possibility of persistent inflation, and the forthcoming presidential race. These are some of the problems that investors focused on non-cyclical stocks like Warren Buffet are never worried about.

To Warren Buffett, none of this big-picture economic jargon holds any significance. The “Oracle of Omaha” is a staunch advocate for the idea that successful investing hinges on identifying a great company that can shrug off macroeconomic concerns to deliver stellar returns and shareholder value.

Whether it’s buying a company’s stock or the entire company, the Berkshire chairman and CEO insist on focusing on high-quality stocks with tremendous growth prospects regardless of the prevailing economic conditions.

Our Methodology

To make our list of the 10 best counter-cyclical and defensive stocks to invest in we scoured through Yahoo Finance and Finviz stock screeners to find 20 high-quality stocks that were the most widely held by hedge funds. Next, we shortlisted our list to 10 stocks that hedge funds are increasingly building positions in. Finally, we ranked the stocks in ascending order based on the number of hedge funds that hold stakes.

At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10 Best Counter Cyclical and Defensive Stocks to Invest in

10. TriNet Group, Inc. (NYSE:TNET)

Market Capitalization as of September 11: $4.63 Billion

Number of Hedge Fund Investors in Q2 2024: 21

TriNet Group, Inc. (NYSE:TNET) is an industrial company that provides comprehensive and flexible human capital management services for small and medium-sized businesses. It offers multi-state payroll processing and tax administration employee benefits programs, including health insurance and retirement plans.

The company provides full-service H.R. solutions to small and midsize businesses, so it is well-positioned to receive a significant boost when rates go down. The Fed cutting rates are expected to make it easier for small businesses to access cheap capital to fuel their core business and, in return, fuel demand for TriNet H.R. solutions.

TriNet Group, Inc. (NYSE:TNET) announced a solid second quarter, achieving revenues close to the upper limit of its expectations. Revenue in the quarter was up 1% to $1.2 billion as the company navigated a challenging business environment. The growth was driven by a 5% increase in professional service revenues that totaled $186 million.

TriNet Group, Inc. (NYSE:TNET) ‘s careful management of costs led to strong profits and cash inflows, allowing the company to buy back $135 million of its shares and distribute $25 million in dividends. Even though it anticipates a modest to 3% increase in total revenues for the third quarter, TriNet sticks to its annual projections and remains hopeful about future expansion, especially in the area of benefits innovation.

TriNet Group, Inc. (NYSE:TNET)’s dedication to reinvesting profits back into its investors is impressive, shown by substantial buybacks of shares and distributions issued over the last three months. These recent events indicate the firm’s robust financial health and strategic efforts to maintain expansion. The stock rewards investors with an annualized dividend yield of 1.06% while trading at a discount with a price-to-earnings multiple of 15.

According to Insider Monkey’s second-quarter database, 21 hedge funds were bullish on TriNet Group, Inc. (NYSE:TNET) compared to 19 hedge funds from the previous quarter. William Von Mueffling’s Cantillon Capital Management remains the largest shareholder in TriNet Group, Inc. (NYSE:TNET), with 763,352 shares worth $76.34 million.

9. Robert Half Inc. (NYSE:RHI)

Market Capitalization as of September 11: $6.42 Billion

Number of Hedge Fund Investors in Q2 2024: 33

Robert Half Inc. (NYSE:RHI) is a staffing and employment services company that provides talent solutions and business consulting services. It provides contract engagement professionals in the fields of finance and accounting, technology, marketing, and creative. It also offers consulting services in the areas of internal auditing, technology consulting, and risk control.

It is one of the best countercyclical stocks to invest in as it is currently trading at a discount at a time when its core business is well poised to receive a significant boost. The company increasingly integrates artificial intelligence into its solutions as part of its commitment to technology and innovation.

Robert Half Inc. (NYSE:RHI) delivered mixed second-quarter results as revenues fell 10% to $1.47 billion. The underperformance was mostly attributed to the staffing recession and margin contraction in the contract talent solution segment, but the company remains optimistic.

Robert Half Inc. (NYSE:RHI) ‘s ability to generate profits has been the catalyst behind the company’s returning value through buybacks and dividends. The company has paid dividends for 21 consecutive years and currently yields 3.27%, which is ideal for generating some passive income.

According to Insider Monkey’s second-quarter database, 33 hedge funds were bullish on Robert Half Inc. (NYSE:RHI). Israel Englander’s Millennium Management holds the largest position in Robert Half Inc. (NYSE:RHI), with over 3.25 million shares valued at $208.04 million.

8. Novo Nordisk A/S (NYSE:NVO)

Market Capitalization as of September 11: $581.98 Billion

Number of Hedge Fund Investors in Q2 2024: 67

Novo Nordisk A/S (NYSE:NVO) is a healthcare company that researches and develops pharmaceutical products. It operates in two segments: Diabetes and Obesity Care and Rare Diseases. Its Rare Disease segment offers products in the areas of rare blood disorders, rare endocrine disorders, and hormone replacement therapy.

Novo Nordisk A/S (NYSE:NVO) ‘s competitive edge as one of the best defensive stocks to invest in stems from its robust pipeline of drugs for the treatment of various medical conditions. Consequently, the company’s revenue stream is constantly guaranteed regardless of how the economy is doing.

Novo Nordisk A/S (NYSE:NVO) dominates the GLP-1 weight loss market, holding 69% of the global market share, with its diabetes medication Ozempic leading with 46% of that share. Launching and selling game-changing weight loss medication is the reason the company’s trailing 12-month revenue grew by 64% over the last year alone. The company’s long-term prospects remain intact, given that the market for obesity-fighting drugs is poised to reach more than $130 billion by 2030.

Sales at Novo Nordisk A/S (NYSE:NVO) increased by 22% in the first quarter, reaching $9.8 billion, and earnings climbed by 28% compared to the same period last year, reaching $3.8 billion. The company’s revenue growth of 29.72% during the same period highlights its ability to expand in a competitive market. A key factor contributing to my optimism about Novo Nordisk is its rapid expansion and the ability to maintain significant profit margins.

While the stock is trading at a price-to-earnings multiple of 31, it rewards income-focused investors with a 1.11% dividend yield. The company has shown commitment to shareholder returns, raising its dividend for 6 consecutive years and maintaining dividend payments for 36 consecutive years.

Sixty-seven hedge funds had investments in Novo Nordisk A/S (NYSE:NVO) in Q2 of 2024, worth $5.68 billion. The largest shareholder in the company is Fisher Asset Management, with a position worth $1.91 billion as of the second quarter of 2024.

Artisan Global Equity Fund stated the following regarding Novo Nordisk A/S (NYSE:NVO) in its Q1 2024 investor letter:

“In addition, shares of Novo Nordisk A/S (NYSE:NVO) rose after it reported phase 1 clinical trial results for its new experimental obesity drug Amycretin, a single molecule that operates as a GLP-1 receptor agonist, reducing one’s appetite. The new oral treatment achieved a 13.1% average weight loss after 12 weeks, more than doubling the efficacy of Wegovy for the same time span. This result also bested Lilly’s Orfoglipron, another experimental drug that achieved 5%–6% average weight loss earlier in its trials. While the Amycretin data are preliminary, investors were encouraged by the prospects of Novo Nordisk solidifying a best-in-class obesity designation, a desirable status given rising competition. In our view, Novo Nordisk has the best obesity/Type 2 diabetes pipeline in the industry, which should help protect this franchise from competition over the next 10 years.”