5 Best Defensive Stocks to Buy in October 2021

We have been in a bull market since US stock markets bottomed in March 2020. However, the fall in September, which was the worst since March 2020, has made investors cautious. As concerns emerge over the longevity of the current bull market, it would be worthwhile adding some of the defensive stocks to the portfolio.

Simply put, defensive stocks are low beta names and their earnings are less sensitive to economic cycles. These are companies that produce daily use goods and services whose demand is not much impacted whether we are in a recession or an economic upcycle. Here are the five best defensive stocks that you can buy in October 2021.

1. PepsiCo (NYSE: PEP)

PepsiCo stock is up only about 4% for the year and is underperforming the markets by a wide margin. However, with its dividend yield of almost 2.9%, and a strong portfolio of beverage and snacks brands, PepsiCo is among the best defensive stocks to buy. Notably, the company has good exposure to snacks also, a strategy that rival Coca-Cola is also trying to emulate.

Last year, PepsiCo fared better than Coca-Cola as it was able to offset the fall in revenues from outdoor cola sales by snacks sales. The company is set to release its fiscal fourth-quarter earnings today and consensus estimates call for a 7.2% rise in sales. However, its EPS is expected to rise only about 4.4% during the period. Notably, PepsiCo has been battling cost inflation which is expected to take a toll on margins. While PepsiCo has said that its forward purchases would help it offset the impact, it might not be able to fully offset the price increase.

Morgan Stanley is bullish on PEP stock ahead of earnings

Morgan Stanley is bullish on PEP stock ahead of its earnings. “We expect another PEP EPS beat in Q3, and another quarter of strong organic sales growth confirming higher LT topline growth after Pepsi’s reinvestment in marketing/cap-ex in recent years,” said Morgan Stanley analyst Dara Mohsenian. He is also bullish on the company’s snacks business and expects its sales to rise between 4-5% organically.

What makes PepsiCo a good defensive stock to buy

“This steady sequential improvement and consistent results give us confidence that the recent topline growth acceleration is sustainable,” said Mohsenian commenting on the strong topline growth that PepsiCo has reported in recent quarters.

PepsiCo is among the best defensive stocks to buy and can deliver decent returns across the business cycle. Its business is now quite diversified and spread between strong beverage and snacks brands. The company is also working to structurally improve its margins.

Overall, PEP looks among the best defensive stocks to buy in October and hedge your portfolio against any possible fall in broader markets. The stock trades at an NTM (next-12 months) PE multiple of 23.4x which seems reasonable.

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2. AT&T (NYSE: T)

If you are an AT&T investor, you might not be a happy lot. The stock is down over 7% this year even as broader markets are up in double digits. The longer-term performance fails to instill confidence either and the stock has lost almost 30% over the last five years. However, after the crash, and considering the pivot towards 5G, T looks among the best defensive stocks to buy.

Wall Street analysts on T stock

Wall Street analysts have a mixed forecast for T stock and it has five buys, four hold, and one sell rating. The average target price of $32.33 is a premium of almost 19% over current prices. The street high target price for the stock is $37. While the stock has been underperforming the markets for quite some time now, it could be a good buy at these prices considering the tepid valuations as it trades at an NTM (next-12 months) PE of only about 8.7x. While there are concerns over the growth outlook and the high debt load, T stock looks attractive at these prices.

AT&T is a defensive stock with a high dividend yield

To be sure, defensive stocks are generally known to pay high dividends. However, T stock stands out with a dividend yield of 7.6%. Especially at a time when the S&P 500’s dividend yield is near historical lows, and CD rates don’t even yield 1% a year, T could be among the defensive stocks that you should consider.

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3. General Mills (NYSE: GIS)

General Mills stock is up around 4% for the year and is underperforming the markets. The stock hasn’t delivered any returns over the last five years and is trading flat over the period. The high dividend yield, which is currently at 3.3% might have provided some succor. However, if you are looking to buy a defensive stock in October, GIS looks like a good buy.

Citi is bullish on General Mills stock

Earlier this month, Citi issued a bullish note on General Mills stock and raised the defensive consumer staples stock from a neutral to buy while increasing the target price from $63 to $70.

“GIS delivered a much better-than-expected fiscal 1Q last week, and the market barely noticed. We think that this is a good story in a tough sector that deserves a second look,” said Citi analyst Wendy Nicholson. Notably, the stock’s valuation multiples have fallen amid the recent underperformance and it trades at an NTM PE of 16.3x which is a discount to its ten years average multiple.

GIS is an attractively valued defensive stock to buy

Nicholson finds the valuation attractive and said “GIS is trading today at a ~20% discount to the market, whereas over the last ten years, the stock has historically traded at a 9% premium to the market.”

Nicholson expects the stock to see a valuation rerating and said “Given GIS’s strong start to its FY22 and our belief that some investors may soon start to nibble on high-quality, consumer staples stocks that offer relatively less risk to their outlooks, we think that a more appropriate valuation for GIS today is for the stock to trade at a 10% discount to the market.”

However, not all are bullish on GIS stock and last month Goldman Sachs had downgraded the stock from a buy to neutral. That said, if you are looking at a defensive stock in the consumer staples industry, GIS looks like a good bet.

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4. Berkshire Hathaway (NYSE: BRK.B)

Berkshire Hathaway is not a defensive stock in strict terms. However, the fact that it is led by the legendary value investor Warren Buffett, and is sitting on a cash pile of $145 billion, makes it a proxy defensive stock. Buffett has been quite defensive about investing the cash and was a net seller of stocks in the second quarter also. The Oracle of Omaha is waiting for the right valuations to invest the cash, which unfortunately he hasn’t found for long.

What makes Berkshire Hathaway a defensive stock?

Think of Berkshire Hathaway as a mutual fund that is sitting on a massive cash pile amid high broader market valuations. These traits are similar to a defensive fund and that’s what makes it a defensive stock worth buying in October. If you are as worried about the stock market valuation as Buffett, you might find some solace in BRK.B stock.

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5. Kraft-Heinz (NYSE: KHC)

KHC is among the companies that Berkshire Hathaway holds in its portfolio. The company has done a business restructuring and the forecast looks positive after the recent underperformance. The stock pays a healthy dividend yield of 5.34% which makes it an attractive defensive stock.

KHC stock forecast

Wall Street analysts are mixed on KHC stock and it has five buys, 10 sell, and two hold ratings. However, its average target price implies a 12% upside over the next 12 months. Meanwhile, with an NTM PE of 15x, KHC looks a good buy at these prices.

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