CPRX - Defense Is The Best Offense: 3 Stocks To Buy

2023-03-31 06:00:00 ET

Summary

• Defense is sometimes the best offense. In the spirit of March Madness and market volatility, it’s time to get defensive as the banking crisis and market uncertainty fuel U.S. recession risks.
• As stocks fluctuate and the Fed suggests tighter credit conditions, investors are on edge with markets in flux following months of rate hikes.
• Defensive sectors like consumer staples, healthcare, and utilities may perform reliably, as speculation of recession amid the banking crisis and a weakening dollar rises.
• The article focuses on three stocks that may benefit from a ‘Risk Off’ market-driven sentiment but possess solid investment fundamentals.
• Using Seeking Alpha’s screening tool, I have identified three Quant Strong Buys from defensive sectors that exhibit growth traits, elements of sustainable profitability, and solid valuation frameworks.

Get defensive as banks fuel US recession risks

The financial sector has spurred chaos around global economies as investors scramble on the defense to find investments with risk-averse qualities to help hedge against volatility. In the spirit of March Madness, where in 2023, we've seen countless brackets demolished and teams beaten down, like investing, without the right tools or fundamentals, stocks and portfolios can go bust. I find that defense is one of the best offenses, so I'm focusing this article on defensive sectors and highlighting how defensive stocks often provide stable earnings and consistent returns amid an economic downturn.

The USD is under bearish pressure as fears of a global financial crisis and Brazil and China 's agreement to stop using the USD for trade intensify. More than $5T in cash has flooded money markets instead of banks. So, consider defensive stocks as an alternative - a more recession-resilient investment that does not diminish pricing power as inflation eats away at the USD.

Defensive investment sectors are sectors of the economy that tend to perform relatively well during economic downturns or periods of market volatility. They are "defensive" because they are less sensitive to changes in the business cycle and tend to be more stable than other sectors. Defensive stocks tend to stay in demand because they provide essential products and services and lower investors' overall risk as they shield portfolios amid downturns, having lower volatility, which is why I'm highlighting three defensive stocks. For diversification, I've selected one utility stock, one consumer staple stock, and one healthcare stock.

3 Top Defensive Stocks to Invest in

Financial crises can be fast-moving. This year started with the fear of recession, exacerbated by the banking crises, potential defaults, and a Fed whose stance on rate hikes continues to create concerns among investors. Factor in geopolitical threats to the economy, including the dollar's weakening.

Although not as robust or sexy of a sector as growth stocks, defensive stocks can be a solid offense for portfolios looking to protect returns during periods of volatility. Investors want to avoid interest rate-sensitive stocks. Defensive stocks may offer better performance, security, and returns. Offering portfolio diversification, I've selected three stocks: Catalyst Pharmaceuticals ( CPRX ), Cal-Maine Foods ( CALM ), and New Jersey Resources Corp. ( NJR ), which have outperformed the S&P 500 over the last year.

CPRX, CALM, and NJR vs. S&P 500 1-Yr Price Performance

As the banking crisis persists, triggering distressed debt and adding stress to the Fed's attempts at taming inflation, there may continue to be some downside. My three stocks can offer some downside protection if you accept some volatility over the short term. Using a Defensive Stocks screener I created, I've identified some of the best defensive stocks according to their quant ratings with a minimum of $1B market cap that should protect returns in a market decline.

A Top Biotech Healthcare Stock to Invest In

Biotechnology stocks offer the best of both worlds: technology and healthcare. Post-pandemic, as the healthcare sector continues to be a necessity, medical products, services, and equipment are constantly in demand. Consider one of my top-rated healthcare stocks that may perform well in the current environment.

1. Catalyst Pharmaceuticals, Inc.

• Market Capitalization: $1.77B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/30): 21 out of 1169

• Quant Industry Ranking (as of 3/30): 12 out of 572

Focused on developing and commercializing therapies for those diagnosed with rare diseases, Catalyst Pharmaceuticals, Inc. is committed to biotechnology and improving patients' lives through efficacious treatments. While the healthcare industry can be a challenging market to tap into, grow, and be profitable, those with a proven track record can benefit despite market downturns. Not only has CPRX been poised for growth, following strong fourth-quarter earnings.

CPRX Stock Growth & Profitability

With a vast pipeline of treatments and therapies, many of which have FDA approval, CPRX delivers exceptional financial performance that beat 2022 net revenue guidance, quarterly revenue growth, and successful execution of strategic initiatives. With an EPS of $0.22 beating by $0.01 and revenue of $60.76M beating by nearly 60% Y/Y, some highlights of the company's growth include granting three new patents, a U.S. court decision to support FIRDAPSE orphan drug exclusivity, and the acquisition of FYCOMPA.

CPRX's gross profit margins outperform its sector peers, 74.71% versus 55.85%, and EBITDA margins boast a 1,418% difference to the sector. Catalyst's executive team remains confident in its growth drivers and outlook, even amid competitor Teva Pharmaceutical ( TEVA ) sending Catalyst a Notice Letter with plans to market a cheaper version of its medicine Firdapse. Catalyst responded by slapping TEVA with a Patent Infringement lawsuit . The January news of Teva's attempts to sell the generic version sent CPRX down 20% before making some recovery, which could prove a great time to buy the dip as the stock maintains bullish momentum.

CPRX Stock Valuation & Momentum

In addition to its mission of helping people, CPRX has tremendous fundamentals, despite its overall 'D' Valuation Grade . With the stock's share price falling in January, I still find value. Its discounted forward P/E ratio of 11.07x compared to the sector's 27.04x and trailing PEG of more than an 80% discount make it attractive, even at its current price point.

Evidenced by its A+ momentum and quarterly price performance above, CPRX is on a bullish trend, gradually increasing its price performance and outperforming sector median peers. Following its price decline in January, the stock is -9.3% YTD. However, over the last year, CPRX has been +102%. Unsurprisingly, investors are actively purchasing shares to drive the stock back to its 52-week high of $22.11, given its achievements over the last year, highlighted in the latest Earnings Call by Catalyst Chairman, President, & CEO Patrick McEnany .

Having ended the year with several significant achievements that aided the company's growth, we were pleased to be recognized for these accomplishments. These included being recognized as one of Forbes 2023 America's Best Small Companies for the second consecutive year, inclusion in Fortune's 2022 top 100 small companies, and being honored as Florida's 2022 Company of the Year as well as being added to the S&P Small Cap 600 Index. These recognitions represent the culmination of our Catalyst team's patient-centric attitude, work ethic, and commitment to excellence."

Consider Catalyst Pharmaceuticals as a Top Biotechnology stock , serving as a portfolio defense, along with this next consumer staple.

Top Consumer Staple Stock To Invest In

When budgeting, people are unlikely to part ways with consumer staples even during market downturns and recessions. Consumer staples are the products, food, and beverages people require - the necessities- so I've selected the following stock.

2. Cal-Maine Foods, Inc.

• Market Capitalization: $2.84B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/30): 5 out of 191

• Quant Industry Ranking (as of 3/30): 2 out of 57

I wrote about specialty shell egg provider Cal-Maine Foods a few times because it not only surged as inflation and the price of eggs served as tailwinds, increasing as high as 23% in April 2022 for a dozen, chicken and many other staples have become a lot more expensive than last year, as costs are being passed onto consumers.

But eggs are food products only a few people are willing to go without, willing to pay astronomical prices for them along with chicken, butter, and many other products. As a result of the egg provider staying CALM despite the challenges other producers and people face in the current economy, Cal-Maine has experienced record growth and profitability, sailing past consensus estimates.

CALM Stock Growth & Profitability

After reporting Q3 earnings this week, Cal-Maine Foods has been on an uptick, surpassing consensus estimates with top-and-bottom-line beats. EPS of $6.62 beat by $1.44, and revenue of $997.49M beat by 108.91% year-over-year, well above expectations, as elevated market pricing amid the ongoing bird flu reduces the nation's egg-laying capacity, which beat by $0.32, and revenue of $592.96M, which beat by nearly 70%, a figure of $16.9M above consensus. CALM is a strong buy to consider for portfolios.

Some Q3 highlights include net income of $323.2M, total egg dozens sold increased by 1.3%, and a cash dividend of $107.7M, or $2.20 per share, which highlights its commitment to shareholders.

We continue to perform at the top of our industry as an efficient operator, despite inflationary market conditions in North America and economic uncertainties globally... we have built an exceptional management team that drives our commitment to be the most reliable producer and distributor of fresh shell eggs and egg products in the United States." - Dolph Baker, CALM CEO .

Although egg prices have seen a pullback from 2022 peaks, CALM, the nation's largest egg producer, continues to increase in sales. Showcasing a 5.13% dividend yield ((TTM)), strong dividend safety, and growth, its variable dividend policy has benefited shareholders equal to one-third of its quarterly income. Year-to-date, shares of CALM are up 8%, and momentum remains full steam ahead.

CALM Stock Valuation & Momentum

Cal-Maine has been on a longer-term uptrend that continues to rise along with its 10-day moving average. Despite its run-up, CALM continues to capitalize on the egg shortage and pricing power while trading at an extreme discount.

CALM's forward P/E ratio of 3.53x is an 82% discount compared to its sector peers, and forward EV/EBIT is -86%. Capturing significant market share to maintain its #1 shell egg producer status as recession fears mount and the banking crisis poses further economic concerns, stay calm. Consider CALM, which capitalized on tailwinds for tremendous growth in the food sector, especially those produced in high volumes and used daily, like eggs, are an excellent consideration for investment.

Top Utility Stock To Invest In

Water, gas, electricity - we need the distributors and companies that operate the utility people so heavily rely on. Although energy and prices generally have soared, even in economic downturns and recessions, consumers want utilities, whose stocks tend to offer value and remain relatively stable.

3. New Jersey Resources Corporation

• Market Capitalization: $5.10B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/30): 4 out of 103

• Quant Industry Ranking (as of 3/30): 1 out of 12

Energy holding company New Jersey Resources Corporation distributes regulated gas to residential and commercial customers throughout New Jersey. With a big earnings surprise resulting in eight FY1 upward analyst revisions, NJR posted an EPS of $1.14 per share for the first quarter of 2023 that beat by $0.43, benefiting from the tailwinds caused by the natural gas market volatility and December's winter storms.

Because NJR owns a difficult-to-replicate distribution network and midstream assets for customers, its area monopoly has caused state regulators to set rates that maintain costs sufficient for customers' ability to pay. The contract between regulators and NJR allows the company to earn modest spreads in the long term, despite the inherent policy headwinds involving the government. Nevertheless, as with most utilities, not only are you receiving a steady income stream, NJR has performed extremely well amid extreme weather events to deliver shareholder value in the form of its tremendous dividend.

On the heels of customer growth, tremendous Q1 earnings included revenues of $723.57M beat by $26.79M. Constructive regulation and successful operations enabled NJR to raise fiscal 2023 guidance by $0.20, to $2.62 to $2.72 per share. NJR's customer base is rapidly growing, above the national average, and offers attractive earnings for shareholder value. As evidenced above, NJR has a solid dividend scorecard , attractive dividend safety grade, and 33 years of consecutive dividend payouts. Although the company is restricted in the degree to which it passes costs onto consumers, its defensive qualities make this dividend aristocrat appealing. Not only is it up 7% YTD but over the last year its +14% and maintains bullish momentum.

NJR Stock Valuation & Momentum

Although trading at a relative premium, New Jersey Resources D+ valuation grade has attractive underlying metrics, including a trailing PEG of 0.21x vs. the sector's 1.14x. This 81% discount and trailing P/E ratio of 18.26x offer investors the opportunity to consider the stock's undervaluation and takes into account solid growth attributes. In addition to valuation, the stock showcases bullish momentum.

With a robust pipeline and pursuit of solar projects, NJR's Clean Energy Ventures offers an outlook for the future as companies switch to solar, also offers positive momentum for the company as they increase operations throughout the state. Although regulatory caps on returns hinder this stock's upside potential, the key is looking for investments with strong fundamentals and the ability to maintain their resilience in an up or down economy. Defense is the best offense.

Defense can be the best offense for a volatile 2023

Investors often turn to defensive sectors during times of economic uncertainty, as they tend to offer a level of stability and protection against market volatility. Defensive stocks in healthcare, consumer staples, and utilities can serve as defenses and inflationary hedges. Because these sectors are essential, people require their products and services for everyday living, health, and well-being.

Even as the challenging macro environment has posed headwinds over the last year, each of my three stock picks is positive. My stock picks CPRX, CALM, and NJR offer strong growth traits, sustainable profitability, solid valuation frameworks, and returns amid rising interest rates. As pricing pressures continue to benefit these stocks, which possess excellent fundamentals and bullish momentum, consider them for a portfolio.

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