We’re looking at recession forecasts, inflation may reach as high as 18%, and we may even face power shortages, but some stocks could outperform in this tough macroeconomic environment.
I’m looking at defensive stocks right now, and these are companies that tend to perform better than others when things get tough. Typical examples include water, utilities, and branded consumer goods — customers tend to be wedded to brands, even when disposable incomes are being squeezed.
This is why Haleon (LSE:HLN) is one of my best stocks to buy right now. The fast-moving consumer goods firm only came into existence a month ago following a split with GSK. Its share price has tanked during that month and it now has a market value half of what Unilever offered GSK for it earlier in the year.
So, let’s take a look at why I’m backing this stock for big gains in the autumn and beyond.
Discounted share price
Haleon shares didn’t do too bad after listing. They never went up, but swayed between 5% and 10% under the listing price.
However, investors developed concerns in August about forthcoming legal cases being brought against GSK. The nearly 3,000 cases concern historic sales of heartburn drug Zantac and negative health effects.
GSK says there is no evidence Zantac causes cancer, while Haleon has distanced itself from the proceedings, saying it is not party to the claims. The first case against GSK was dismissed. But the GSK and Haleon share prices are still down.
From what I’ve read, Haleon doesn’t seem to be facing too much risk from these Zantac cases.
Haleon is now down 16% over the past month. It currently has a price-to-earnings (P/E) ratio of around 17, and a forward P/E of around 15.5.
That’s not particularly cheap, but stocks with defensive qualities don’t tend to come cheap. This is because they’re largely able to continue delivering on targets even if economic conditions get worse.
Defensive qualities
When macroeconomic conditions worsen, investors look for defensive stocks. Haleon owns brands like Sensodyne, Advil, and Voltaren, all of which are household brands.
That gives it pricing power and the capacity to pass on costs to consumers. As the share price settles, I’m expecting investors to start buying Haleon shares as a defensive purchase.
Other defensive stocks such as Unilever have been pushing upwards in recent months. It’s worth noting that Unilever trades with a P/E of 20. As noted, defensive stocks aren’t cheap and will be increasingly in demand as the year progresses.
Positive forecast
A long, deep, and drawn-out recession won’t be good for consumer spending, but that’s not what we’re expecting in the UK. Instead, the recession will be shallow and the forecast is pretty steady for Haleon.
“Haleon has an adequate collection of brands and market positions which should enable the group to grow organic sales at the low end of its 4-6% guidance“, Royal Bank of Canada said in a recent coverage update. The analysts have a price target of 300p.
This is slower than over the previous year, but still positive. Haleon sales rose 14% to £2.6bn as of GSK’s last report, with strong growth across all categories.
With the above in mind, I’ve already bought Haleon shares, and would buy more at the current price.
