ANDE - The New Flight To Safety Trade: Gold Oil And Defensive Stocks

2023-10-31 07:00:00 ET

Summary

• Global tensions create fear as investors flock from riskier investments to safer assets - a phenomenon known as a flight to safety trade.
• The goal of a flight to safety trade is to preserve capital and mitigate risks until more favorable market conditions return. Notably, all 3 recommendations in this article are +30% this year.
• Gold is up ~10% YTD, oil +3% YTD, and the defensive sector is largely flat against the S&P 500 -2.6% over the last four weeks.
• Stocks with “safety” attributes and strong fundamentals can provide portfolio diversification and may benefit from ‘Risk Off’ market-driven sentiment.
• Seeking Alpha’s screening tool can help identify Quant Strong Buys that exhibit growth traits, elements of sustainable profitability, and solid valuation frameworks when investors seek a flight to safety.

The Flight to Safety

Investor fear is again moving the markets as tensions rise in the Middle East. In addition to the war in Israel, the war in Ukraine persists, inflation remains high, and the complex geopolitical relations involving China and Russia prompt investors to flee for safety. When economic uncertainty abounds, and investors fear a market crash or fall in their portfolios, many sell out of riskier assets to those offering greater safety, a phenomenon known as a flight to safety trade. During the last four weeks, Utilities were the second best performing sector, and the Consumer Staples sector was down -3.23% compared to the Consumer Discretionary sector, down -5.54%.

Where billionaire investor Ray Dalio once said, “Cash is trash,” no other fixed-income asset has outperformed the dollar year-to-date; cash is king so far in 2023. With a tight labor market, restrictive monetary policy, growing government debt levels, and rising geopolitical risks, investors are flocking to cash, gold, oil, and defensive companies.

The CNN Fear & Greed Index indicates that fear is moving the markets.

What are defensive stocks?

Negative investor sentiment is the emotion currently driving the market. Defensive investment sectors are sectors of the economy that perform relatively well during volatility, economic downturns, or turbulent times. 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 stay in demand because they provide essential products and services and lower investors’ overall risk as they shield portfolios amid downturns. In October, defensive stocks experienced an uptick following Hamas’ attack on Israel, yet defensive stocks aren’t seeing the anticipated rally. While defensive stocks do not typically have the run-up like growth stocks because they are meant to defend against portfolio losses and tend to offer conservative returns when people want safety, like we’re seeing, it’s no surprise that defensive stocks, while experiencing a modest uptick, are relatively flat. But as Senior Quantitative Strategist Zach Marx, CFA , states, “Flat is good when your stocks are not going down.” If you know your time horizon and how long you want to be defensive in meeting your investment objectives, it’s key amid the flight to safety to consider defensive stocks. I’ve selected three stocks in varied sectors for diversification: one oil stock, one gold stock, and one consumer staple.

Oil

Hamas’ surprise attack on Israel prompted a formal declaration of war, and while Israel is not home to major oil production, increased violence in the region could impact output in the Middle East. Iranian oil output has been growing, yet the violence could cause a slowdown, which is also a potential issue for the second-largest oil producer in the world, Saudi Arabia. With current Brent oil forecasts expected to be above $95, one of the biggest benefactors could be Marathon Petroleum Corporation.

1. Marathon Petroleum Corporation ( MPC )

• Market Capitalization: $58.38B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 10/30/23): 12 out of 242

• Quant Industry Ranking (as of 10/30/23): 1 out of 74

Marathon Petroleum Corporation is the #1 quant-ranked oil and gas refiner and, together with its subsidiaries, operates as an integrated downstream energy company. Despite the economic challenges posed by fluctuating prices, MPC is one of my favorite dividend stock picks.

Marathon Petroleum Dividend Scorecard

Boosting its quarterly dividend by 10% and offering an additional $5B in share repurchases, Marathon Petroleum provides steady income for investors to hedge against inflation and potential portfolio losses – crucial for defense.

MPC Stock Growth & Profitability

Over the last two years, Marathon has crushed earnings and revenue estimates 100%. Second quarter EPS of $5.32 beat by $0.73 and revenue of $36.82B beat by $2.94B. Benefitting from fuel demand amid volatile fuel price swings headwinds around the globe, MPC’s Return on Total Assets ((TTM)) of 14.75% and cash from operations of nearly $15B highlight why Marathon is a high-quality company that offers a diverse geographic footprint and offers investors dividend consistency. Over the last 90 days, 16 Wall Street analysts revised their estimates up, with zero downward revisions, and given 11 years of consistent dividend payments, an ‘A’ dividend safety grade, not only does Marathon offer tremendous profitability and strong overall fundamentals, it trades at a discount.

MPC Stock Valuation

MPC is up 32% YTD and up nearly 30% over the last year. With an overall C- Valuation grade, MPC has a forward P/E of 6.36x, a -38% difference from its sector peers, indicating it is relatively undervalued. Its trailing PEG is -58% difference. At the current price point, bullish momentum, and earnings beats over several quarters, MPC, which has experienced 13 upward revisions over the last three months and zero downward revisions, offers value and growth at its current price. Set to report earnings for Q3 on October 31st at 11 a.m. ET, this oil stock offers a great opportunity to capitalize on potential upside – nearly as good as gold.

Alternatively, many other Top Energy stocks can be found in the energy sector as ranked by the Quant model.

Gold

Gold has been the go-to investment for many investors looking for safe-haven protection when uncertainty arises for thousands of years. While the raw material itself comes with storage and protection challenges, the price of gold can also be affected by the economic environment, supply and demand factors, and inflation. Investing in gold stocks can help diversify a portfolio and offer protection in hopes of withstanding market turbulence amid economic uncertainty. Although the Fed’s ‘higher for longer’ stance has caused gold to fall recently as Treasury yields and the U.S. dollar surged, it started to rebound as the war in Israel has investors seeking safe-haven investments.

2. Harmony Gold Mining Company ( HMY )

• Market Capitalization: $2.90B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 10/30/23): 3 out of 289

• Quant Industry Ranking (as of 10/30/23): 1 out of 46

With over 70 years in the industry, Harmony Gold Mining Company is a global, sustainable mining and exploration company and the largest gold producer in South Africa. In addition to gold, Harmony offers exploration, extraction, and processing of materials and commodities, including copper, uranium, silver, and molybdenum deposits.

Harmony expanded its footprint in Australia and Papua New Guinea with its Eva Copper and Wafi-Golpu Projects. Harmony's dividend is likely to be cut, in line with capital allocation priorities and goals for growth and expansion. With a focus on driving costs down and improving its free cash flow and global footprint, Harmony’s long-term goal is to continue delivering shareholder value. During its latest earnings report, Harmony Chief Executive Officer Peter Steenkamp stated :

Our investment in our people, quality ounces, and operational excellence continue to yield results. Over the past few years, we have shown resilience and demonstrated our ability to deliver to plan, regardless of the challenges that we might face. We have created the necessary flexibility to maintain the strong momentum we have built at our mines. Our cost base is stable and predictable, and we have implemented good controls in ensuring our cost increases are in line with our plans. In short, we have improved our safety performance and engineered a higher quality and diversified portfolio. We have delivered operational consistency and strong free cash flows. What we achieved in this financial year demonstrates our succeeding in our goal.

Despite FOREX and gold price fluctuations, increasing production costs amid higher costs of services, contractors, and consumables, Harmony has continued to shine. Harmony is well-positioned financially with improved margins and diversified revenue streams, and the stock also comes at a discount.

Harmony Gold Valuation & Momentum

Harmony Gold is up 31% YTD and more than 65% over the last year. Its momentum signals are strong, with quarterly price performance outperforming its sector-median peers. As we look at the three-month, six-month, and nine-month performance, underlying figures support the overall A+ momentum grade.

In addition to strong momentum, Harmony’s valuation also comes at a relative discount, showcasing a forward P/E ratio of 7.55x compared to the sector median of 14.63x and forward EV/Sales of 1.09x, a difference to the sector of -21.75%. Despite the quant ratings signaling a potential cut to Harmony’s dividend, the company has solid financials and is attractive on growth and profitability, resulting in upward analyst revisions.

HMY Growth & Profitability

By prioritizing capital, HMY aims to enhance margins, generate greater returns, and improve its production. Through targeted acquisitions and significant copper and gold resources, Harmony’s Eva Copper Project has seen a 4% year-on-year increase as of June 30, 2023.

With a growing international footprint, Harmony showcased several key highlights during its August 30th results. Exceeding guidance in total gold produced, HMY’s performance was driven by higher underground recovered grades and lower costs.

Harmony’s Mponeng mine experienced a 16% increase in recovered grade and a 22% increase in gold production. Operating cash flow is up 108% from FY22 to FY23, and according to Harmony’s Form 6-K , Harmony’s EPS is expected to be between $0.43 and $0.45. As highlighted by Harmony’s Quant Growth Grades , year-over-year revenue growth is 15.55%. HMY’s forward EBITDA Growth is 22% versus the sector median of 1.6%, a whopping 1,280.65% difference to the sector. With Israel’s advance into Gaza, energy and natural resources like gold have been some of the top gainers over the last five days, and our quant model has many other Top Gold stocks . Consider Harmony Gold Mining Company for your portfolio.

Top Consumer Staple Stock

Despite Consumer Staples ( XLP ) ranking among the lower-performing sectors in the past year, grappling with inflation and elevated expenses, it typically remains resilient during market declines, warfare, and economic recessions. This trend highlights a potential opportunity to buy during price dips while offering a protective investment option. Regardless of the economic climate, people still require food and hygiene products. Last year, I wrote about The Andersons, Inc. in an article titled Ukraine’s Crisis And Sanctions Against Russia Have Ignited Commodity Stocks. YTD, ANDE is up 46%, as it holds a strong position in the agriculture sector, boasting a diversified portfolio that encompasses trading, ethanol production, and the provision of fertilizers. The company’s products have performed well given the need and high demand for food distribution, particularly plant nutrients, and logistics.

3. The Andersons, Inc. ( ANDE )

• Market Capitalization: $1.65B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 10/30/23): 4 out of 187

• Quant Industry Ranking (as of 10/30/23): 1 out of 7

Geopolitical tensions have disrupted the price of raw materials, from oil and gas to wheat, and many other commodities. As an unintentional beneficiary of global conflicts, Ohio-based food distributor The Andersons, Inc. is a top-ranked, diversified consumer staple company involved in commodity trading, ethanol, and manufacturing and distributing plant nutrients.

Rallying nearly 40% over the last year, Andersons manages more than 100 facilities, including Trade, Renewables, and Nutrient & Industrial, that account for 38M tons of crops annually, +533M gallons of ethanol, and byproducts, and it holds more than 30 U.S. Patents.

Lowering its debt, crushing ethanol margins with higher yields and lower costs; increasing volumes in its nutrient and industrial segment; and maintaining strong, consistent overall operating cash flows; ANDE is expected to grow.

ANDE Growth & Profitability

In 2022, Andersons' growth and results were impacted by the strong demand for its products following Russia’s invasion of Ukraine. Despite headwinds that included shifts in California’s carbon fuel standards, pricing fluctuations that contributed to a fall in ANDE’s Q2 2023 revenues of $4.02B, missing by $113.72M Y/Y, Andersons EPS of $1.52 beat by $0.43, its second-best Q2. Its strong renewable business and ethanol partnership with Marathon Petroleum have allowed both companies consistent growth. ANDE is the 5th largest U.S. ethanol producer, helping to crush margins, given its diversified product lines and ability to pass costs onto consumers amid inflationary pressures, ANDE stands to benefit from all segments.

Offering 26 years of consecutive dividend payments, despite the modest yield and its dividend growth grade, Andersons' profitability has enabled it to return value to its shareholders with a $0.185 dividend, in line with previous. Moreover, the stock is up more than 45% YTD while continuing to trade at a discount.

ANDE Stock Valuation

The Andersons comes at a strong A- valuation grade highlighted by a Non-GAAP forward P/E ratio of 15.77x versus the sector median of 16.70x. In addition to its 0.15x forward EV/Sales, which are more than a 90% difference to the sector, its Price/Sales ((FWD)) are also more than a 90% difference, and ANDE has a tremendous A+ grade for Price/Cash Flow ((TTM)) of 1.36x versus the sector median 12.28x. A wider selection of Top Consumer Staple stocks can be found in our stock screener.

Conclusion: Defend your portfolio

Safe-haven sectors and industries can offer a solid defense for portfolios as investors look to protect returns during periods of volatility. Interest rate sensitivity and global tensions are prompting investors to trade in riskier investments for defensive stocks – a flight to safety trade.

In hopes of better performance and security, I selected a gold, oil, and a consumer staples stock, each of which is outperforming the S&P 500 by at least three times. My stock picks MPC, HMY, and ANDE offer strong growth traits, sustainable profitability, solid valuation frameworks, and strong returns amid rising interest rates, increasing market volatility, and ascending global tensions.

As fears of economic slowing and pricing pressures continue to benefit these stocks, investors becoming defensive or going to cash are looking for assets with excellent fundamentals. All three stocks should appeal to investors looking to reduce risk exposure to protect their capital with “risk off” investments. Consider my safety trade picks, or you can filter from many top-rated stocks according to your preferences. Alternatively, if you're seeking a limited number of monthly ideas from the hundreds of top quant stocks, consider exploring Alpha Picks . Alpha Picks uses a data-driven process to identify stock picks from the best ‘Strong Buy’ Quant recommendations.

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