With the market dropping for three consecutive weeks, it’s understandable that investors are starting to get nervous. Market indices dropped by over 2% at one point this afternoon due to the potential ripple effects of a default of a major Chinese real estate company. When you add in recent concerns over the passage of fiscal measures and the infrastructure bill, things certainly appear dicey.
While I don’t believe we are headed for a market crash, there’s no reason for investors to consider less risky stocks in their portfolios. I consider safe or defensive stocks to be less risky due to a number of features. The first is beta. According to Investopedia, beta is a measure of the volatility of a security or portfolio compared to the market as a whole.
So, if a stock has a beta of 1, it has the same volatility as the market. That’s why I only want to consider stocks with a beta below 1. In addition, I also want companies that have a consistent history of positive earnings growth and a Buy rating in our POWR Ratings system. Three stocks that fit the bill are Colgate-Palmolive Company (CL), Quest Diagnostics Incorporated (DGX), and W.W. Grainger, Inc. (GWW).
Colgate-Palmolive Company (CL)
CL a leading global consumer product company. In addition to its namesake oral care line, the company manufactures shampoos, shower gels, deodorants, and home care products sold in over 200 countries worldwide. It also owns specialty pet food maker Hill’s, which sells its products through veterinarians and specialty pet retailers.
The company’s stock has benefited from a solid second quarter where both its top and bottom lines rose year over year. This was due to continued business momentum and investments in the digital transformation. So far, CL remains on track with its growth management initiatives. For instance, its organic sales rose 5% due to higher volume and improved pricing.
In fact, this was the 10th consecutive quarter of organic sales growth around its target of 3-5%. Innovation has been key as part of this strategy, such as growing in adjacent categories and product areas. For instance, CL has created premium versions of its Oral Care products. This resulted in organic sales growth of 10% in the oral care segment in the most recent quarter.
E-commerce is another area where the company sees growth. Last year, CL saw 50% growth in e-commerce, and this growth accelerated in the second quarter this year. CL has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Stability Grade of B due to stable growth, as mentioned above and a Beta of 0.39.
This indicates the stock is less than 50% volatile than the market. CL also has a Quality Grade of A as its cash balance of $937 million as of the end of the second compares favorably to short-term debt of only 15 million. We also provide Growth, Value, Momentum, and Sentiment Grades for CL, which you can find here.
CL is ranked #18 in the Consumer Goods industry. For more top stocks in this industry, click here.
Quest Diagnostics Incorporated (DGX)
DGX is a leading independent provider of diagnostic testing, information, and services in the U.S. The company generates over 95% of its revenue through clinical testing, anatomic pathology, esoteric testing, and substance abuse testing with specimens collected at its national network of nearly 2,300 patient service centers, as well as multiple doctors’ offices and hospitals.
In the most recent quarter, the company had better-than-expected earnings and revenues. In fact, this was the first quarter since 2019 where it recorded organic base testing revenue growth. This was driven due to new hospital lab management contracts and more people returning to see doctors and get tests.
DGX is poised to continue this momentum in the coming months. In terms of COVID-19 testing, the company saw a brief decline in volume during the second quarter, but towards the end of June, testing started to increase due to the rapid spread of the delta variant. The company also benefits from more testing as employees return to the workplace and students return to the classroom.
In addition, advances in technology are increasing the number of complex esoteric and gene-based tests available to patients. This benefits DGX since they typically carry a higher profit margin. The company has an overall grade of B and a Buy rating in the POWR Ratings system. DGX has a Value Grade of B due to a trailing P/E of 9.23 and a forward P/E of 18.94.
The firm’s price-to-sales ratio of 1.9 is also well below the industry average. DGX also has a Quality Grade of B due to solid fundamentals. For instance, it has a current ratio of 1.4, which indicates it has more than enough liquidity to handle short-term obligations. The company also has a favorable debt-to-equity ratio of 0.8.
The stock also has a tiny beta of only 0.19. For the rest of DGX’s grades (Growth, Momentum, Stability, and Sentiment), click here.
DGX is ranked #9 in the Medical – Diagnostics/Research industry. For more top-ranked stocks in this industry, click here.
W.W. Grainger, Inc. (GWW)
GWW distributes 1.5 million maintenance, repair, and operating products that are sourced from over 4,500 suppliers. It is a business-to-business distributor of maintenance, repair, and operating (MRO) products and services. The company serves approximately 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches.
The company has invested in its e-commerce capabilities in recent years and is the 11th- largest e-retailer in North America. In its High Touch Solutions segment, the company saw strong year-on-year revenue growth in almost all its end markets in the second quarter. This was due to a recovery in non-pandemic product volume.
Demand was especially high in the commercial and heavy manufacturing end markets. It also saw year-over-year sales growth in its Endless Assortment segment, driven by solid customer acquisition in its Zoro U.S. and MonotaRO business. Due to this performance, management projects net sales for 2021 between $12.7 billion and $13 billion.
Its Canada business is also an attractive market and should deliver double-digit operating margin growth over the next few years. In fact, GWW has been reducing its cost structure in Canadian operations to drive profitable growth. The company has an overall grade of B, translating into a Buy rating in our POWR Ratings system.
GWW has a Stability Grade of B, which makes sense with a beta of 0.81 and consistent sales growth of around 4% per year. The company also has a Quality Grade of A due to a rock-solid balance sheet. GWW had $247 million in cash compared with no short-term debt as of the most recent quarter. The company is also efficient, with a return on equity of 46.6. To access all of GWW’s grades (Growth Value, Momentum, and Sentiment), click here.
GWW is ranked #42 in the B-rated Industrial – Equipment industry. For more top stocks in this industry, make sure to visit this link.
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This article was written by David Cohne, Chief Value Strategist for StockNews.com. David has helped investors find the most profitable stocks for over 20 years.
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CL shares fell $0.15 (-0.20%) in after-hours trading Monday. Year-to-date, CL has declined -9.44%, versus a 16.85% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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