In this article, we discuss 10 cash-rich defensive stocks to buy before recession.
The average savings of daily Americans are drying up as the United States economy slows down. Data from the New York Fed indicates that it is becoming more challenging for lower income households to make payments as job openings come down, unemployment claims go up, and inflation continues to hover at near record levels. Governmental measures like unemployment benefits, stimulus checks, an eviction ban, and low interest rates, which had helped lower income workers, have all but ended as well.
The housing market is also cooling off, adding to recession fears at the stock market. Data from real estate firm Redfin shows that home sale cancellations are touching multi-year highs. In July, 63,000 home purchase agreements were called off, representing 16% of homes that went into contract during the month. This is a 1% increase from the cancelations in the month of June. A slow housing market could be a major headwind for the US economy that is already reeling from other pressures, per Bill Adams, the chief economist at Comerica Bank.
Investors are thus flocking to cash-rich defensive options that guarantee safe haven from the larger economic crisis. Some of these include Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG). The central bank in the US is poised to approve another rate hike in September after raising the rate by 75 basis points in both June and July. This increase could trigger even more interest in cash-rich defensive plays at the marketplace.
Our Methodology
The companies that are cash-rich and deliver products or services that can withstand a larger economic slowdown were selected for the list. The business fundamentals of these firms and the latest updates related to them are also discussed to provide some additional context. Data from around 900 elite hedge funds tracked by Insider Monkey in the second quarter of 2022 was used to identify the number of hedge funds that hold stakes in each firm.
Pixabay/Public Domain
Cash-Rich Defensive Stocks to Buy Before Recession
10. General Electric Company (NYSE:GE)
Number of Hedge Fund Holders: 49
Free Cash Flow as of August 29: $3.34 billion
General Electric Company (NYSE:GE) is a high-tech industrial firm. In late July, the firm posted earnings for the second quarter of 2022, reporting earnings per share of $0.78, beating analyst expectations by $0.36. The revenue over the period was $18.6 billion, up over 1.5% compared to the revenue over the same period last year and beating estimates by $700 million. The firm revealed that organic orders during the quarter had grown by 4% and total orders raked in more than $18.7 billion.
On August 16, Bernstein analyst Brendan Luecke resumed coverage of General Electric Company (NYSE:GE) stock with an Outperform rating and a price target of $100, noting that the Inflation Reduction Act would help boost the sales of the firm in the coming months.
At the end of the second quarter of 2022, 49 hedge funds in the database of Insider Monkey held stakes worth $3.8 billion in General Electric Company (NYSE:GE), compared to 51 in the previous quarter worth $4.8 billion.
Just like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), General Electric Company (NYSE:GE) is one of the stocks on the radar of elite investors.
In its Q2 2022 investor letter, Vulcan Value Partners, an asset management firm, highlighted a few stocks and General Electric Company (NYSE:GE) was one of them. Here is what the fund said:
“We purchased General Electric Company (NYSE:GE) during the quarter. In 2018 Larry Culp became CEO and initiated a multi-year restructuring program. After many years of divesting and restructuring the business, the company’s attractive assets are showing through. GE operates in four segments: aviation, health care, power, and renewables. The aviation segment makes and services jet engines and generates around 55% of its profits. The health care segment produces a broad suite of diagnostic products and generates around 40% of profits. The other two segments, power and renewables, are making improvements, and will be combined and spun off in early 2024. GE continues to unlock shareholder value and strengthen its balance sheet. The company also generates solid free cash flow. Recent stock price volatility provided an opportunity for us to purchase the stock, once again, with a margin of safety.”
9. AT&T Inc. (NYSE:T)
Number of Hedge Fund Holders: 55
Free Cash Flow as of August 29: $14.33 billion
AT&T Inc. (NYSE:T) is a media, communications, and technology firm. On July 21, the firm posted earnings for the second quarter of 2022, reporting earnings per share of $0.65, beating analyst expectations by $0.03. The revenue over the period was more than $29 billion, down close to 17% compared to the revenue over the same period last year and beating estimates by $130 million. The firm also revealed that it was increasing mobility service revenue guidance to 4.5-5% growth for the full year.
On August 18, MoffettNathanson analyst Craig Moffett maintained a Market Perform rating on AT&T Inc. (NYSE:T) stock and lowered the price target to $17 from $19, noting that the firm had accelerated subscriber growth but cut dividend forecasts.
At the end of the second quarter of 2022, 55 hedge funds in the database of Insider Monkey held stakes worth $1.7 billion in AT&T Inc. (NYSE:T), compared to 74 in the preceding quarter worth $4 billion.
In its Q2 2022 investor letter, Argosy Investors, an asset management firm, highlighted a few stocks and AT&T Inc. (NYSE:T) was one of them. Here is what the fund said:
“I purchased shares of AT&T Inc. (NYSE:T) prior to its spin-off of Warner Brothers Discovery (WBD). Most people are probably familiar with AT&T. They are a major cellular service provider, and until recently owner of the Time Warner media assets, which include HBO, CNN, TNT, TBS, Cartoon Network, DC Comics and the Batman content brands, and more. At the time of my purchase, I estimated that the combined T/WBD assets traded at a 15% levered FCF yield, or 6x FCF. I also believe that WBD, which now has HBO Max, has future growth in front of it which was previously in doubt when Discovery was primarily tied to the declining cable television bundle. Since then, Netflix reported disappointing subscriber growth, which threw all streaming companies into disarray. WBD followed that news with a disappointing outlook on its business during its own quarterly earnings.
As a result, shares of WBD have declined nearly 40% since the spin-off. WBD now trades for 7x 2023E FCF and there is great potential for returns over the next few years as WBD pays down debt used to finance its merger combining Warner Brothers and Discovery and grows. We do not own a large position in WBD at present, but we may add to it over time.”
8. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 60
Free Cash Flow as of August 29: $10.24 billion
The Coca-Cola Company (NYSE:KO) is a beverage company based in Georgia. In late July, investment advisory Morgan Stanley, in a research note to clients, identified The Coca-Cola Company (NYSE:KO) as one of the attractive companies that operated in beverages, a preferred sector for investors to target as a worsening economic backdrop threatens consumer spending broadly. The investment bank underlined that the things that gave the firm advantages in the market were pricing power, post-COVID recovery, and the benign competitive dynamics of the industry.
On July 20, JPMorgan analyst Andrea Teixeira maintained an Overweight rating on The Coca-Cola Company (NYSE:KO) stock and lowered the price target to $70 from $73, backing the firm to continue as a defensive holding with upside with strong underlying momentum.
Among the hedge funds being tracked by Insider Monkey, Nebraska-based firm Berkshire Hathaway is a leading shareholder in The Coca-Cola Company (NYSE:KO), with 400 million shares worth more than $25 billion.
7. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Holders: 70
Free Cash Flow as of August 29: $28.44 billion
Pfizer Inc. (NYSE:PFE) makes and sells biopharma products. On August 28, the company announced the results from a study that a bivalent vaccine candidate for the respiratory syncytial virus had led to an 86% of efficacy against the severe disease in those aged 60 years and older. The firm aims to access a $10 billion market for RSV vaccines through the drug. The company is one of the most reliable drug stocks in the US, with a dividend history stretching back more than three decades.
On August 1, investment advisory Barclays maintained an Equal Weight rating on Pfizer Inc. (NYSE:PFE) stock and raised the price target to $52 from $50. Analyst Carter Gould issued the ratings update.
At the end of the second quarter of 2022, 70 hedge funds in the database of Insider Monkey held stakes worth $2.8 billion in Pfizer Inc. (NYSE:PFE), compared to 79 in the preceding quarter worth $4.1 billion.
In its Q4 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Pfizer Inc. (NYSE:PFE) was one of them. Here is what the fund said:
“While the level of general turnover abated as we progressed through 2021, it remained high in one area: post-COVID-19 recovery plays. The concept behind this investment thesis was, and still is, straightforward: with the advent of effective vaccines, the path from pandemic to endemic is just a matter of time. As this transition occurs, the estimated excess savings of over $2 trillion built up on U.S. consumer balance sheets will unlock dramatic pent-up demand for experiences, especially global travel. This investment case seemed especially compelling when the Pfizer vaccine positively surprised markets in November 2020. As a result, we made post-COVID-19 stocks (which were trading well below our estimate of recovery value) a sizable theme within the portfolio. We understood this to be a more aggressive tilt in positioning because it required a major improvement in demand to catalyze fundamentals and drive price toward higher business values. While we accepted that recovery would not be smooth and that it would take time to deploy vaccines both domestically and globally, we decided that recovery was the logical path of least resistance and we were being well compensated for these risks.
What we did not account for, however, was vaccine hesitancy and the risk of further infection waves. As a result, the first variant wave, Delta, was a negative surprise to both the market and our team. When the risk surfaced, we immediately updated our probability-driven models and debated how we should react. The resulting conclusion was that the recovery would be delayed and that we should reduce our exposure quickly, subsequently targeting the most aggressive recovery stocks such as cruise lines. We again acted swiftly and decisively to the positive surprise that Pfizer Inc. (NYSE:PFE) had delivered a high-efficacy antiviral COVID-19 pill. This pill should greatly reduce COVID-19 severity risks globally, increasing the probability of a global travel recovery in 2022. While this is still true, the emergence of the highly mutated Omicron variant set off another infection wave which spurred us to again act quickly and further reduce our risk exposure. This back-and-forth may sound exhausting, but it highlights our compulsion to act if we determine a surprise has a large enough impact on the probabilities that power our valuation-driven investment cases.”
6. UnitedHealth Group Incorporated (NYSE:UNH)
Number of Hedge Fund Holders: 91
Free Cash Flow as of August 29: $20.45 billion
UnitedHealth Group Incorporated (NYSE:UNH) operates as a diversified healthcare firm. The company has an impressive dividend profile. It has paid a dividend to shareholders consistently for the past nineteen years. In the past twelve years, these payouts have registered consistent growth as well, in a sector where the median in this regard is just two years. On August 17, the firm declared a quarterly dividend of $1.65 per share, in line with previous. The forward yield was 1.21%.
On July 25, Argus analyst David Toung maintained a Buy rating on UnitedHealth Group Incorporated (NYSE:UNH) stock and raised the price target to $650 from $580, appreciating the solid earnings of the firm in the second quarter and raised guidance.
At the end of the second quarter of 2022, 91 hedge funds in the database of Insider Monkey held stakes worth $10.9 billion in UnitedHealth Group Incorporated (NYSE:UNH), compared to 103 in the preceding quarter worth $12.8 billion.
In addition to Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), UnitedHealth Group Incorporated (NYSE:UNH) is one of the stocks that hedge funds are monitoring.
In its Q2 2022 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and UnitedHealth Group Incorporated (NYSE:UNH) was one of them. Here is what the fund said:
“UnitedHealth Group Incorporated (NYSE:UNH) also contributed to performance during the quarter. United’s operating income grew +3% on difficult year-ago comparisons as benefits members utilized more services compared to last year. Optum Health grew operating income +40% as more patients are enrolled in the Company’s value-based care services. The Company estimates nearly a third of all medical care is unnecessary and represents an opportunity to capture savings for both patients. Optum’s integrated platform of patient data, IT, and service providers are focused on driving out these unnecessary costs and should serve as the engine for long-term, mid-teens earnings per share growth.”
5. Berkshire Hathaway Inc. (NYSE:BRK-B)
Number of Hedge Fund Holders: 109
Free Cash Flow as of August 29: $20.77 billion
Berkshire Hathaway Inc. (NYSE:BRK-B) is a diversified holding company with interests in finance, transport, and utility businesses. On August 8, the company posted earnings for the second quarter of 2022, reporting a revenue of more than $76 billion, up over 10% compared to the revenue over the same period last year. The operating earnings during the quarter stood at around $9.28 billion, up more than 38% compared to the same period last year. The firm has outperformed the S&P 500 this year even as recession fears loom over the market.
Berkshire Hathaway Inc. (NYSE:BRK-B) is seeking to make a bid for full control of energy giant Occidental, reports in the media suggest. Berkshire chief Warren Buffett has acquired a 50% stake in the firm in the past few months.
At the end of the second quarter of 2022, 109 hedge funds in the database of Insider Monkey held stakes worth $17 billion in Berkshire Hathaway Inc. (NYSE:BRK-B), compared to 104 in the preceding quarter worth $19 billion.
In its Q1 2022 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and Berkshire Hathaway Inc. (NYSE:BRK-B) was one of them. Here is what the fund said:
“Diversified holding company Berkshire Hathaway Inc. (NYSE:BRK-B) reported strong earnings during the quarter and benefited from continued share repurchases below intrinsic value. The company also announced significant deployments of excess cash during the quarter, including the acquisition of Alleghany and a large increase in its stake in Occidental Petroleum.”
4. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 128
Free Cash Flow as of August 29: $107.58 billion
Apple Inc. (NASDAQ:AAPL) is a diversified technology company. On August 24, a report by Counterpoint Research revealed that the company witnessed 147% year-over-year growth in the premium Chinese smartphones market in the second quarter of 2022, despite a slowing Chinese economy where consumers are cutting back their spending. Reports suggest that the company has raised plans for the December quarter and the second-half of the year to 100 million units, up from a prior 88 million previously.
On August 19, KeyBanc analyst Brandon Nispel maintained an Overweight rating on Apple Inc. (NASDAQ:AAPL) stock and raised the price target to $185 from $177, noting that the firm had taken a strong start to the second half of the year.
At the end of the second quarter of 2022, 128 hedge funds in the database of Insider Monkey held stakes worth $143 billion in Apple Inc. (NASDAQ:AAPL), compared to 131 in the preceding quarter worth $182 billion.
In its Q2 2022 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and Apple Inc. (NASDAQ:AAPL) was one of them. Here is what the fund said:
“Apple Inc. (NASDAQ:AAPL) grew revenues +9%, driven by +17% growth in the Services segment. While iPhone revenues grew a modest +5%, it was on an exceptional year ago comparison of +66%. iPhone continues to capture most industry smartphone profits by focusing on high-end price tiers. Apple Inc. (NASDAQ:AAPL) is taking nearly two-thirds of the revenue share in the premium ($400 and above) smartphone segment. Further, most of the growth was driven by expansion in the “ultra-premium” price tier of $1000 or more per unit.[1] As we have highlighted in the past, Apple’s relentless focus on the development and integration between hardware (especially integrated circuits) and software continues to add significant value for customers of its products and services. We expect this favorable competitive dynamic to continue for the foreseeable future.”
3. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holders: 153
Free Cash Flow as of August 29: $65.18 billion
Alphabet Inc. (NASDAQ:GOOG) is a diversified technology company. Even as the US economy slows down and hammers growth stocks, the company is expected to weather this storm better than peers. One of the reasons for this is that the firm recently posted $65 billion in free cash flow over the last year. This will enable the company to continue to sponsor growth initiatives in the coming months even amid recession fears. The online ad market is also expected to recover, giving a further boost to the shares.
On August 3, Tigress Financial analyst Ivan Feinseth maintained a Strong Buy rating on Alphabet Inc. (NASDAQ:GOOG) stock and raised the price target to $186 from $183, noting that the core business of the firm had shown resilience despite a larger market slowdown.
Among the hedge funds being tracked by Insider Monkey, London-based investment firm TCI Fund Management is a leading shareholder in Alphabet Inc. (NASDAQ:GOOG), with 2.4 million shares worth more than $5.4 billion.
In its Q2 2022 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and Alphabet Inc. (NASDAQ:GOOG) was one of them. Here is what the fund said:
“Alphabet Inc. (NASDAQ:GOOG) grew its core search revenues +24% on a +30% year-ago comparison. Despite this stellar top-line performance, shares sold off as the market began to discount fears of a recession. However, the stock has outperformed relative to other holdings as core Google Search has been less affected by disruptions related to Apple’s privacy initiatives. Alphabet’s Cloud segment is generating revenue at a $24 billion run rate but is still running at a loss. We think this business can generate much better margins at some point. In the meantime, the Company has 4% to 5% of shares authorized for repurchase which is an attractive use of capital as the stock trades for about just 18X 2023 consensus estimates.”
2. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 184
Free Cash Flow as of August 29: $35.83 billion
Meta Platforms, Inc. (NASDAQ:META) is a tech firm that owns and runs social media platforms. The company has spent over $14 billion on stock repurchases so far this year as it seeks to pivot to the metaverse. In the quarter ended June 30, the firm had over $4.45 billion in free cash flow. The firm is exploring a possible debt sale of around $10 billion in order to offer some of the cash pressures on the stock in light of recession concerns.
On August 19, Morgan Stanley analyst Brian Nowak maintained an Overweight rating on Meta Platforms, Inc. (NASDAQ:META) stock and lowered the price target to $225 from $280, noting that execution uncertainty the firm faced was already reflected in the share price.
At the end of the second quarter of 2022, 184 hedge funds in the database of Insider Monkey held stakes worth $18 billion in Meta Platforms, Inc. (NASDAQ:META), compared to 200 in the preceding quarter worth $19 billion.
In its Q4 2021 investor letter, Boyar Value Group, an asset management firm, highlighted a few stocks and Meta Platforms, Inc. (NASDAQ:META) was one of them. Here is what the fund said:
“Corporate executives can have many different reasons for selling shares (anticipation of tax law changes, philanthropy, diversification, and much more), but the sheer number of billionaire founders who sold shares in 2021 should raise eyebrows and might well be signaling a market top. Bloomberg’s Ben Steverman and Scott Carpenter report not only that Mark Zuckerberg of Meta Platforms, Inc. (NASDAQ:META) (formerly known as Facebook) sold shares in his company almost every day last year but also that the founders of Google sold ~$3.5 billion worth of stock (the first time either Sergey Brin or Larry Page has sold shares since 2017).”
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 258
Free Cash Flow as of August 29: $65.15 billion
Microsoft Corporation (NASDAQ:MSFT) is a Washington-based technology firm. The company is expected to be a top defensive pick in the tech sector during a recession due to the strength of enterprise spending, cloud budgets, consumer product demand, and digital advertising. Microsoft Corporation (NASDAQ:MSFT) is also one of the few tech firms that offer a healthy mixture of value and growth to investors. It has paid a dividend to shareholders for close to two decades even as the share price skyrockets.
On July 27, Wedbush analyst Daniel Ives maintained an Outperform rating on Microsoft Corporation (NASDAQ:MSFT) stock and lowered the price target to $320 from $340, noting that the metrics around cloud and commercial bookings looked strong for the firm.
Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Microsoft Corporation (NASDAQ:MSFT), with 28 million shares worth more than $7.3 billion.
In its Q1 2022 investor letter, Carillon Tower Advisers, an investment management firm, highlighted a few stocks and Microsoft Corporation (NASDAQ:MSFT) was one of them. Here is what the fund said:
“Stock selection contributed the most while sector allocation was also positive. An underweight to communication services and an overweight to energy helped performance, while an underweight to consumer staples and an overweight to materials detracted. Stock selection was strong within healthcare and materials but was weak within information technology and industrials. Microsoft Corporation (NASDAQ:MSFT) reported positive results driven by personal computing strength, but analysts were especially positive on its growth outlook for its Azure cloud-computing services.”
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Disclosure. None. 10 Cash-Rich Defensive Stocks to Buy Before Recession is originally published on Insider Monkey.
