Portfolio diversification is key to managing investments in a volatile market. With high CPI data, investors debate whether central bankers will continue to raise rates. But the slowdown in US economic growth makes tightening less certain. This uncertainty makes investors nervous, precisely when a defensive portfolio works best. Some companies discussed in this article include Cal-Maine Foods (NASDAQ: CALM), Shell (NYSE: SHEL), and BP (NYSE: BP).
A defensive and diversified portfolio may include utilities, consumer staples and healthcare stocks. Some investors like to add energy, banks, and consumer discretionary into the mix, but these cyclical sectors come with additional risks.
Overvalued and Unloved
Coca-Cola, Kellogg's, and Procter & Gamble have all proved popular consumer staples stocks, but each now faces headwinds and may be considered overvalued. Meanwhile, Cal-Maine Foods is the largest producer of high-quality fresh eggs in the United States. Eggs are an inexpensive source of protein, increasing consumer attraction and investor interest in Cal-Maine stock.
Oil stocks are once more on the investor radar thanks to their history as a proven inflation hedge. Many energy bulls see oil and gas prices rising again as winter gets underway and demand returns, even in the event of a recession.
With so much money in energy markets, even the threat of a windfall tax does little to dissuade. However, politics can influence the sector, and this adds to the volatility in these energy names. Shell and BP's most significant advantage over other energy names is their visible transition to renewables. They have the expertise, the access to funds and the decades of industry knowledge to apply to this arduous undertaking.
According to Morgan Stanley, the case for energy remains compelling but less so than 12 to 18 months ago. Central bank rate raises weigh on oil demand, as does a slowdown in China. Meanwhile, earnings and consensus estimates from oil companies are up, supporting continued dividend growth in the sector.
Oil majors Shell (NYSE: SHEL) and BP (NYSE: BP), for example, have recently declared dividend raises and share buybacks, keeping investor interests at the forefront of their strategy. They're both making significant moves into renewables, potentially reducing their 'sin stock' status and helping them meet ESG mandates.
Year-to-date, Cal-Maine Foods (NASDAQ: CALM), Shell (NYSE: SHEL), and BP (NYSE: BP) each display an impressive uptick in their stock prices. Meanwhile, the S&P 500 is down close to -12%.
Cal-Maine Foods (NASDAQ: CALM)
Cal-Maine Foods (NASDAQ: CALM) offers poultry products. The company produces, cleans, grades, packs, and sells fresh shell eggs. Cal-Maine Foods serves customers in the United States.
Fluctuating wholesale shell egg market prices significantly affect operating results at Cal-Maine Foods.
Historically, shell egg prices have risen during periods of constrained supply, such as the latest highly pathogenic avian influenza (HPAI), the bird flu, which was first detected in February 2022. According to an opinion piece in the Financial Times, we should be concerned about avian flu.
Shell egg prices have also risen during periods of high demand, such as the beginning of the COVID-19 pandemic and when high protein diets are trendy. A focus on protein has soared in recent years, and the popularity of eggs as a diet staple has too. This gives Cal-Maine Foods stock a defensive quality.
Q4 earnings showed a solid finish to fiscal 2022 for Cal-Maine Foods. Record quarterly revenue performance was driven by significantly higher average selling prices and record quarterly specialty shell egg sales. This was supported by solid demand compared with Cal-Maine's prior-year quarter.
Dolph Baker, chairman and CEO of Cal-Maine Foods, commented:
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.
However, rising input costs are hitting the business, and a slowdown in demand for eggs could cause Cal-Maine Foods' share price to fall.
Shell (NYSE: SHEL)
Shell (NYSE: SHEL) explores and refines petroleum products. The company produces fuels, chemicals, and lubricants. Shell serves clients worldwide.
Furthermore, Shell's renewable energy business is doing well, with good results on display. Looking ahead, it sees opportunities not just in commodity-producing assets but also in building new companies. Many of these new business models (i.e., hydrogen) still need to be proven, but the company will work with governments and customers to ensure new opportunities crystalize.
The company is also looking to expand its wind-power business in Australia.
Discussing its Q2 earnings results, Shell CEO Ben van Beurden addressed shareholder and analyst questions. Its adjusted earnings came in at $11.5bn and announced a $6bn share buyback in Q3. Planning the 2023 budget, the company expects capital expenditure may rise with some anticipated inflationary headwinds. For instance, steel is being pressured with around 18% inflation.
Nevertheless, Shell runs on framework agreements, which means it locks in prices and volumes over a long period, giving it leeway in costs and a resilient supply chain.
Shell's CEO remains bullish on the oil demand and a higher price. The oil and gas market is tight, and there is little spare capacity around.
BP (NYSE: BP)
BP (NYSE: BP) is another defensive energy company. The company explores and produces oil and natural gas, refines, markets, and supplies petroleum products, generates solar energy, and manufactures and markets chemicals such as terephthalic acid, acetic acid, acrylonitrile, ethylene, and polyethylene.
In its Q2 2022 earnings results, BP displayed its defensive nature in all its glory. Despite continued volatility in global energy markets, earnings results show disciplined delivery continues. Reported profit came in at $9.3bn, and its net debt fell for the ninth quarter in a row. The group also announced a further $3.5bn share buyback.
The company is investing in a greener economy via multiple routes, one of which is distributing 11,000 fast chargers across Europe in a $1bn partnership with Iberdrola.
Meanwhile, it is reducing its crude refining footprint. BP agreed to sell its stake in a Toledo, Ohio refinery to its JV partner Cenovus Energy for $300m in cash. The sale will leave the company with just two crude refineries in the US.
Earlier this year, BP also agreed to sell its 50% non-operated stake in the Sunrise oil sands project in northern Alberta to Cenovus.
The company is also exiting its Mexican oil assets in its shift toward renewables.
Bernard Looney, CEO and Director, said:
Our strategy in oil and gas is to maximize returns and cash flow, creating resilience through lower costs, higher margins and lower operating emissions, focusing on the best barrels, and high-grading through divestments, at the right time and for the right value.
