Credit Suisse found stocks to play the rebound, but also protect against inflation

Published Sat, Apr 24 20218:10 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

A banner run for cyclical stocks has helped to push stock market valuations to lofty levels, leading some to worry that stocks are too expensive just as the United States is moving into a strong growth period. Looking to thread the needle, Credit Suisse strategists searched for defensive stocks that can benefit during the expansion. The firm said in a note to clients on Thursday that U.S. GDP might grow by 8% or more this year, but there are "red flags" that make them cautious about going all in on cyclical stocks. (Cyclical stocks are companies whose prospects are tightly linked to a growing economy.) Instead, the firm looked for defensive plays that should still also perform well in a strong economic environment. "We add to 'cyclical' defensives (i.e. defensives that have some economic sensitivity and appear cheap)," the note said. The firm put together a list of stocks in defensive sectors with positive correlations to rising inflation expectations and outperform ratings from Credit Suisse analysts. The list has a heavy emphasis on stocks related to health care. One major name on the list is Laboratory Corp ., which bounced back quickly from last year's pandemic sell-off as Covid testing emerged as an important source of revenue. The stock is trading more than 30% above where it was last February pullback, and Credit Suisse analysts still see the stock as a buy. Two hospital companies also made the list in HCA Healthcare and Universal Health Services . Hospitals saw their businesses get squeezed last year as many areas banned optional procedures during the height of pandemic in the U.S. HCA's stock was effectively cut in half last February, but the share price has now climbed steadily since October and is about 33% above where it was trading pre-pandemic. It is also well liked on Wall Street, with buy ratings from 78% of analysts, according to FactSet. Universal Health Services, on the other hand, is trading right around where it was last February, making it a significant laggard compared with the broader market. It has buy ratings from 54% of analysts, according to FactSet. One non-health care name on the list is Constellation Brands . The stock's correlation with rising inflation expectations is minor compared to the other names on the list, but it does have the added benefit of a 1.3% dividend yield. Additionally, Credit Suisse said that utilities companies with inflation-linked pricing schemes could be smart defensive plays in a cyclical upturn.

Laboratory Corporation of America Holdings (LabCorp) phlebotomist processes a lab sample at a Community Clinic Inc. health center in Silver Spring, Maryland.

Andrew Harrer | Bloomberg | Getty Images

Looking to thread the needle, Credit Suisse strategists searched for defensive stocks that can benefit during the expansion. The firm said in a note to clients on Thursday that U.S. GDP might grow by 8% or more this year, but there are "red flags" that make them cautious about going all in on cyclical stocks. (Cyclical stocks are companies whose prospects are tightly linked to a growing economy.)