Invest In These Fortress Stocks During A Chaotic Market: Cisco, Caterpillar, And More

It is said by F. Scott Fitzgerald that an individual with a high level of intelligence is capable of holding two opposing ideas in mind at the same time while still functioning. Even as many stocks have fallen behind in 2023, investors have had to take that into account because the market has seen solid gains over the past decade.

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It is not hard to think about the dozens of factors that could be impacting the market but at first glance don't appear to be so. There are problems in the banking industry and concerns about a recession. The Nasdaq Composite COMP +2.39% has gained 13.3% so far this year, while the S&P 500 SPX +1.91% has gained 5.6% so far this year.

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Even so, if you look closely, it is fair to say those issues are having an impact on the stock market: approximately 60% of the index's return is derived from the top five stocks in the S&P 500. Only about one third of the component companies outperform the index, meaning that the majority are trailing behind.

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Many of today's successful companies are doing well in part as a result of investors scrambling to find shelter in companies with high so-called competitive moats, or business models that are hard to copy by their competitors. This is one reason why a few companies, mostly in tech, are doing so well.

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In a research report, Desh Peramunetilleke, global head of microstrategy at Jefferies, stated that the trend is unlikely to reverse anytime soon, as economic risks are on the rise. Consequently, high quality at a reasonable price and low volume will remain key focus areas as the economy slows down, and hence the demand for moats will only increase as the economy slows down.

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As a result of the strong market performance in the first quarter, even if some of the gains were attributed to only a few stocks, Peramunetilleke believes that the market will remain fairly rangebound throughout the remainder of the year. There will be a worsening of the economic conditions in the second half of the year.

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As a result of this, sectors that display defensive characteristics, such as communication services, healthcare, staples, and utilities, will outperform those that have weaker defensive characteristics. He wrote that, “At present, we still favor sectors that have earnings resilience in the event of an economic slowdown in the second half of 2023 while avoiding those that have earnings that will be most susceptible to it”.

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There is an argument to be made that investors should focus on companies that have a strong moat while avoiding the temptation to take advantage of fair-priced stock deals on the market this year, Peramunetilleke said. He encourages investors to focus instead on quality at an affordable price in order to avoid disappointment.

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There are a number of stocks that the chairman recommends in this category, such as the parent company of Facebook, Meta Platforms (ticker: META), Cisco CSCO -0.10% Systems (CSCO), Adobe (ADBE), Caterpillar (CAT), and Humana (HUM).

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There are several companies likely to win with low risk, including Walmart (WMT), Merck (MRK), McDonald's (MCD), Altria Group (MO), and Realty Income (O). As investors seek to benefit from China's reopening after the pandemic without the risk associated with Chinese stocks, he believes companies with exposure to the country will continue to thrive.