We recently compiled a list of the 10 Best Counter Cyclical and Defensive Stocks to Invest In. In this article, we are going to take a look at where Philip Morris International Inc. (NYSE:PM) stands against the other 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).
A man exhaling smoke from a cigarette indicating the use of tobacco products.
Philip Morris International Inc. (NYSE:PM)
Market Capitalization as of September 11: $193.54 Billion
Number of Hedge Fund Investors in Q2 2024: 70
Philip Morris International Inc. (NYSE:PM) is arguably a top consumer defensive stock amid the transition to a smoke-free future. The company’s edge as one of the best defensive stocks to invest in stems from offering products that are outside the tobacco and nicotine sector. Its product portfolio includes cigarettes and smoke-free products.
The firm is moving forward with its business change amidst an increase in consumer awareness about health and strict rules aimed at discouraging smoking. Even though the number of cigarettes sold in the U.S. is going down, Philip Morris International still sees strong interest from around the world because of more people being born and a wider acceptance of smoking in different cultures.
The manufacturer of Marlboro cigarettes and the IQOS tobacco heating device announced adjusted earnings per share (EPS) for the second quarter of $1.59, with income increasing by 9.6% compared to the previous year, reaching $9.47 billion.
Philip Morris International Inc. (NYSE:PM) saw a significant rise in the sales of its tobacco-free products, with sales climbing by 23.5% to 243.8 million cans. The sales of nicotine pouches also experienced a remarkable increase of 50.6% to 149.9 million cans, driven by the success of its Zen brand, which saw a 50.3% increase in the number of cans it delivered.
Philip Morris International Inc. (NYSE:PM) is also putting a lot of money into alternatives to smoking, like ZYN nicotine pouches, which made up roughly 38% of its total earnings in the first six months of 2024. To keep up with increasing demand, the company has put $232 million into its Owensboro, Kentucky production plant, which is anticipated to create about 450 direct new positions and bring in around $277 million in yearly economic benefits for the area.
In addition to the robust growth and expansion in pursuit of growth opportunities, it remains one of the best stocks to invest in owing to its attractive dividend yield of 4.10% while trading at a price-to-earnings multiple of 18.
By the end of Q2, 70 hedge funds held shares in Philip Morris International Inc. (NYSE:PM), with total stakes amounting to $9.54 billion. As of June 30, the largest shareholder was GQG Partners, managed by Rajiv Jain, with a position worth $3.67 billion.
Overall PM ranks 5th on our list of the best counter cyclical and defensive stocks to buy. While we acknowledge the potential of PM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PM, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.