Wall Street likes these defensive stocks, especially during a sell-off

Published Thu, May 5 20222:30 PM EDTUpdated Thu, May 5 20222:54 PM EDT

As the market heads into another sell-off, erasing Wednesday's Fed relief rally, investors on the lookout for some defensive names to cushion their portfolios may be in luck. Thursday's market slide comes less than one day after the Federal Reserve lifted its benchmark interest rate 50 basis points in an attempt to fight surging inflation, sending the Dow Jones Industrials more than 900 points higher as investors believed the central bank might steer the economy into a so-called "soft landing." But the wipe-out Thursday indicates a very different reappraisal as the markets signal that investors may now fear a recession is on the horizon. But analysts say there are still ripe opportunities for investors searching for protection. Technology stocks are experiencing the brunt of the sell-off, but Bank of America thinks there are even some bright spots there. Shares of Apple have fallen 11.3% year to date, but during the last two recessions, the iPhone maker continued to grow earnings through new products, wrote analyst Wamsi Mohan. IBM previously saw its shares fall 20-40% in recessions but experienced a strong earnings recovery in the wake of the 2007 to 2009 downturn. "With the spin-off of its infrastructure services business Kyndryl, we believe the company has a better cost basis to weather a downturn," Mohan said. Guggenheim thinks restaurant chain owner Yum Brands can perform well even amid ongoing pressures in China. Taco Bell and KFC continue to gain momentum in the U.S. and the company is a "lower risk" name than Starbucks to play a China recovery . Meanwhile, Goldman Sachs said in a recent note that Constellation Brands and PepsiCo make attractive plays given their "strong pricing power and defensible margins." Analysts also see strength in consumer staples stocks which tend to keep their market share and perform well even when prices surge and a recession looms. One of those is warehouse club Costco , which turned up on a recent CNBC Pro screen that looked for Nasdaq survivors that could grow earnings in a tough environment. "With a defensive/staples-heavy sales mix and loyal member base, we believe COST shares continue to hold significant fundamental appeal as a mega-cap 'growth staple,'" wrote Baird's Peter Benedict. "Valuation is elevated, but COST's P & L should prove more durable than most retailers in the face of a more difficult spending backdrop." Biopharma stocks are another defensive move to play a recession. Large-cap biopharma specifically outperforms the S & P 500 during a recession, wrote Wells Fargo analyst Mohit Bansal in April. Some top past performers include Pfizer and Eli Lilly . Telecom providers generally offer above-average dividends to investors even when the economy slows, and Barclays thinks that AT & T is one of the strongest names. Shares of AT & T are up 7.2% year to date and are trading at a discount to peers, wrote analyst Kannan Venkateshwar in March. Its stock could grow 40% from Wednesday's close price, based on the bank's price target. Aside from telecom, Barclays recently named Walmart and McDonald's among its top defensive picks. Both companies have benefited from strong demand even in a recession. The bank also likes energy companies such as Chevron . — CNBC's Michael Bloom contributed reporting.

Signage is displayed outside a Yum! Brands Inc. Taco Bell restaurant in Lockport, Illinois.

Daniel Acker | Bloomberg | Getty Images

As the market heads into another sell-off, erasing Wednesday's Fed relief rally, investors on the lookout for some defensive names to cushion their portfolios may be in luck.