Play defense with these fortress stocks in the second quarter

Published Sun, Apr 2 20237:02 AM EDTUpdated Sun, Apr 2 20238:25 AM EDT

Investors should expect more volatility as the second quarter gets underway — and they may want to start preparing for a recession, experts say. That means finding fortress stocks to protect their portfolios. Turmoil in the bank sector has renewed fears of an economic slowdown as financial institutions tighten lending conditions. DoubleLine Capital CEO Jeffrey Gundlach recently said the bond market is giving " red alert recession signals " as the Treasury yield curve rapidly becomes less inverted. The increasing evidence of an economic slowdown, coupled with the likelihood that the Federal Reserve will end its interest rate hikes, creates a "push-pull," said David Bahnsen, chief investment officer at The Bahnsen Group and author of DividendCafe.com. The central bank, which has indicated that hikes are nearing an end , meets again in May. "That push-pull enhances volatility," he said. There will also be continued vulnerability around the banks, he said. "That leads me to having an agnostic view on the markets." Quarterly Investment Guide Markets and the economy survived a tough first quarter, but it's not going to get any easier These S & P 500 stocks crushed it in the first quarter. Here’s where analysts see them going ETF outlook: Why Wall Street strategists aren't chasing a growth stock trade just yet Bitcoin outlook: Crypto may be in a bull market now, but investors should still tread carefully Seasonality is also in play, said Nancy Tengler, chief investment officer for Laffer Tengler Investments. "If you look at seasonality in a pre-election year, April is usually pretty strong," she said. "We think that May could get a little choppy and difficult." In fact, nearly 70% of Wall Street investors think the S & P 500 could see declines ahead, after a positive first quarter , according to a new CNBC Delivering Alpha investor survey of about 400 chief investment officers, equity strategists, portfolio managers and CNBC contributors who manage money. So where should investors turn to create a defensive position? Several investors and strategists spoke with CNBC about names they think can withstand the volatility and offer protection during a recession. Dividend payers Stocks with dividends pay investors to wait out the volatility. Bahnsen's investment philosophy focuses specifically on high-quality stocks that have a high dividend yield, along with consistent increases. One of his favorite plays is Procter & Gamble , which currently has a dividend yield of 2.5%. In comparison, the S & P 500 is currently yielding 1.61%. "It makes products that people are going to buy whether we are in a recession or not," he said. Those products include laundry detergent, paper towels and baby diapers. He also likes Simon Property Group , although it is a more volatile stock. The real estate investment trust invests mostly in shopping malls. The stock pays a "very juicy" dividend yield that is paid entirely by cash flow and net operating income, Bahnsen said. Simon Property Group has a yield of 6.4%, according to FactSet. The company has high quality brick-and-mortar assets, with good tenants and locations, he noted. "There are things that can go bad in their business," Bahnsen said. "Those things are well protected for by having good assets, by having a good balance sheet and by having $7 billion in liquidity," he said. "The bad things that can happen, they can get through." Meanwhile, Tengler likes EOG Resources for its dividend and has been adding the stock back into her portfolios after selling in the fourth quarter. EOG has a 2.9% dividend yield and also has been paying a special dividend. "In the trailing one-year period, they've paid out about $6 in special dividends. So that's great even though you may not agree with our assessment of where energy's going. We think it goes up," she said. "We're getting paid to wait and that's a great position to be in a volatile market." EOG YTD mountain EOG Resources year-to-date Another energy name that made the list is Kinder Morgan , which operates about 82,000 miles of pipelines and 140 terminals. Dan Eye, chief investment officer at Fort Pitt Capital Group, likes the name for its stable fee-based revenue stream. "Their contracts with the customers are very long-term contracts," he said. "Kinder Morgan really utilizes a kind of tollbooth like method when collecting fees, so much more exposed to volumes than they are to the underlying commodity prices." It also has an attractive 6.3% dividend yield, which helps offset some of the market volatility. Health-care names Names in the health-care sector are generally considered defensive. They also tend to pay decent dividends. In keeping with his dividend theme, Bahnsen likes Gilead Sciences , which currently yields 3.6%. He also likes Merck and Johnson & Johnson , which yield 2.7% and 2.9%, respectively. "The models of these pharmaceutical companies are very friendly to dividend growth. They have a lot of recurring cash flow," he said. The first priority of that cash flow is research and development, or in the case of Merck, mergers and acquisitions, Bahnsen said. The second priority is dividends, he added. Fort Pitt Capital Group's Eye likes Bristol-Myers Squibb as a fortress stock in the health-care space. "The stock is very cheap, it trades at about eight and a half times earnings, which is about a 50% discount to the broad market," he said. "That gives them some valuation support." They also have a really strong and attractive pipeline, as well as a good dividend yield of 3.3%, he added. Eye also likes medical device company Danaher . "It's one that we have as very defensive because about 75% of their revenue is recurring revenue, which is up from about 45% back in 2015," he said. "Once the pharmaceutical companies and the drug manufacturers incorporate Danaher in their products in their production process, they're generally in there for decades." Consumer stocks In another typically defensive sector, consumer staples name Kimberly-Clark stands out for Eye. "Diapers, toilet paper, and tissues are pretty inelastic and about as insensitive to the economy as you can imagine," he said. "[It's a] business with really strong cash flows. We think it's one that holds up very well in uncertain times." KMB YTD mountain Kimberly-Clark year to date The stock also has a 3.5% dividend yield. Meanwhile, Delano Saporu, CEO of New Street Advisors Group, believes Campbell Soup is a safe value play. The stock is down so far this year, after a strong 2022. "It's still growing sales really well," he said. "It is reading really favorably to its competitors." Saporu also likes consumer discretionary name Nike , which had a strong last quarter. "Even in recessionary, fortress times, I think they still do well," he said. "They are shifting to that direct-to-consumer, higher market." Playing defense with defense In the defense sector, Raytheon Technologies is Tengler's favorite stock. The defense contractor won a $1.2 billion contract from the U.S. Army last year to supply National Advanced Surface-to-Air Missile Systems to Ukraine. "They have a huge backlog," Tengler said. "We're in an increasingly hostile, geopolitical world, and so we think that that's going to continue to just be a place to grow and grow pretty efficiently." She also owns L3Harris Technologies and Lockheed Martin . Tech names While tech has rallied since the start of the year, Art Hogan sees certain names continuing to do well in the second quarter. He specifically likes Microsoft , Meta and Apple . "They all continue to run lean and efficient businesses that likely will push all those names higher, said Hogan, chief market strategist at B. Riley Wealth Management. He also likes Amazon , which he said was probably the biggest overspender in the pandemic era but has taken draconian steps to right-size their organization. "The long-term valuation of these names is very compelling," he said. "On a price-to-earnings multiple and what likely will be a slower economic growth environment, they are still going to be the harbors of safety." Meanwhile, Tengler likes ServiceNow . It's a more aggressive name, but she would use any weakness to continue to add to her position. "It's a company that has continued to deliver in the 20 plus percent earnings growth rate, even last year," she said. She called its chief executive Bill McDermott, "probably the best CEO in technology." IRA beneficiaries Two other names on Tengler's list are Quanta Services and Linde . Quanta Services has a dividend yield on the lower end, at 0.2%. The company, which provides infrastructure solutions for the energy industry, will benefit from the Inflation Reduction Act's investment in renewable energy, Tengler said. Industrial gases company Linde is also a beneficiary of the IRA, which will subsidize hydrogen to a greater extent, she added. "We like that name for a whole of reasons," Tengler said. "We think hydrogen is going to be a really interesting solution as we continue down the green energy path." Since it is a little expensive, be deliberate about where you pick your spot to buy, she said.