On the surface, all seems well with this market. The S&P 500 is up about 14% for the year. It’s up about 20% over the last year. But a look under the hood tells a much more concerning story and makes a case for buying cheap defensive stocks.
Until this month, technology had driven this market higher. The performance of the other ten sectors on the S&P 500 was rather lame. But the technology juggernaut is rolling over in a big way.
In terms of driving the market higher, the main force is the high-capitalization magnificent seven stocks which include Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA). These stocks posted a year-to-date collective return of 40% at the end of June. In July, these stocks have returned -5%. Yet the S&P 500 is flat for July.
After being virtually the only force driving the market higher, technology has been the worst-performing of the eleven S&P 500 sectors this month. The best-performing stock sectors in July are REITs and utilities, by far the worst-performing YTD sectors before July. The overall market may be flat for the month of July, but a tectonic transformation is taking place under the hood.
July would be a very ugly month for the market if it weren’t for other sectors picking up the slack from technology. Previously beleaguered sectors have risen to the occasion. The most notable transformation has been among the more interest rate-sensitive stocks as well as small-cap stocks.
The reason for the reversal in fortunes is a vastly improved interest rate prognosis. The main catalyst was the better-than-expected June CPI number. Diminishing inflation directly prompted a more optimistic view that the Fed will begin cutting the Fed Funds rate in September, and there will likely be three cuts before the end of the year. There is also a common perception that overall interest rates will trend lower in the months ahead.
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Since the day of the CPI report. REITs and utilities have been the best-performing market sectors. These same sectors had been dogs for the better part of the last two years amid rising inflation and interest rates. As a result, many of these stocks are selling at historically cheap valuations and high yields. The sectors are also defensive and will hold up well in the event of a slowing economy.
True, it’s only been one month of good performance. Technology is down but not out, especially with the artificial intelligence growth catalyst and earnings season. But I don’t believe the strong performance of interest rate-sensitive stocks is a temporary blip. It is more likely just the beginning of a long overdue sustained move higher. Cheap defensive stocks are a great place to be in a market that is increasingly looking toppy. Here are two great ones to consider.
2 (Cheap) Defensive Stocks to Buy Now
Brookfield Infrastructure Corporation (BIPC)
Yield: 4.3%
BIPC is stock representing shares in the same entity as the original Brookfield Infrastructure Partners (BIP), except that instead of a Master Limited Partnership BIPC is in the form of a regular corporation.
Bermuda-based Brookfield Infrastructure Corporation owns and operates infrastructure assets all over the world. The company focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income-generating assets on the planet but infrastructure is rapidly becoming a more timely and popular subsector.
The world is in desperate need of updated infrastructure. The private sector is filling the need as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising billions of dollars a year for infrastructure investments. It’s almost becoming a new assets class.
As one of the very few tested and tried hands, Brookfield is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, the original BIP has provided a total return of 742% (with dividends reinvested) compared to a return of 430% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.
Brookfield operates a current portfolio of over 1000 properties in more than 30 countries on five continents. The company operates four segments: Utilities (30%), Transport (30%), Midstream (30%) and Data (10%).
Assets include:
· Toll roads in South America
· Telecom towers in India and France
· Railroads in Australia and North America
· Utilities in Brazil
· Natural gas pipelines in North America
· Ports in Europe, Australia and North America
· Data centers on five continents
The dividend is rock solid with a low 70% payout ratio and a history of steady growth. The payout has grown by a CAGR (compound annual growth rate) of 10% per year since 2009 and the company is targeting 5% to 9% annual growth going forward.
Why Is It Cheap?
While long-term performance has been great. This cheap defensive stock has struggled amid the high interest rate environment. It has returned -6% over the last two years, but this is a likely big beneficiary of the changing interest rate narrative, and it has momentum.
American Tower Corporation (AMT)
Yield: 3.1%
American Tower is a Real Estate Investment Trust (REIT) that owns, operates, and develops an extensive portfolio of cell towers and other communications assets worldwide. It’s a mobile communications infrastructure powerhouse with over 220,000 cell towers in 25 countries on six different continents, as well as 28 data centers in the U.S. American Tower is headquartered in Boston, has been in business more than 28 years, and has roughly $96 billion in market cap.
Cell towers are fantastic assets to own. Cell towers are those weird-looking poles you see around with boxy antennas that send and receive signals to and from cell phones and other mobile devices. They are what provide the Wi-Fi for mobile network service. Cell phones can’t work without them.
Telecomm companies lease these towers out rather than going to the added expense of building or acquiring their own. And demand for mobile data continues to grow. Cell phones become more advanced and connected to the internet as do a slew of newly enabled technologies for cars and other devices that connect to the internet. There are rapidly growing applications for video conferences, cloud services, and hybrid working scenarios.
The more advanced 5G infrastructure and the artificial intelligence applications it enables are fueling the traffic growth. According to research from telecom company Telefonaktiebolaget LM Ericsson (ERIC), average mobile data usage per smartphone is set to rise from 21 GB in 2023 to 56 GB in 2029. 5G’s share of mobile data traffic is forecast to grow by 76% in the next six years. And total mobile data traffic is estimated to grow by a factor of around 3X between 2023 and 2029.
As demand for mobile data grows, so will demand for wireless infrastructure and American Tower’s properties.
American Tower’s customers include mobile network operators, multinational telecommunications companies, media, and broadband providers. The largest U.S. customers are Verizon (VZ), AT&T (T), and T-Mobile (TMUS). These reliable customers are signed to long-term leases of five-to-ten years and the towers have exceptionally low churn rates. Revenues are highly dependable, and the business has automatic growth built in.
Why Is It Cheap?
Two years of underperformance. The total return from the start of 2022 to the end of 2023 was -20%. That performance is despite the fact that American Tower has grown earnings at better than 10% per year on average for the last three years. But AMT is up over 20% since the July 9 CPI number. It is still cheap and has pent-up upside and momentum.
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