When markets start to get choppy and volatile, such as today, investors need to find the right mix of stocks to keep in a portfolio to achieve a certain level of safety and predictability in their return profile. After the sharp sell-off and brief recovery in the S&P 500 after the so-called “carry trade,” investors were left with the concern of whether their capital would be safe in the stock market moving forward.
Investors can look to leaders like Warren Buffett and his most recent purchases to ease these concerns. One of these high-conviction plays is in the energy sector, as the Oracle of Omaha bought up to 29% of Occidental Petroleum Co. (NYSE: OXY). However, this sort of stock tends to fluctuate with the commodity cycle, as it is highly dependent on oil prices.
So, stocks of another nature should be considered; the consumer staples sector, as characterized by its low exposure to the business cycle, can be a good place to start. Buffett also found a home for a small portion of his billions in shares of Ulta Beauty Inc. (NASDAQ: ULTA) as consumers' go-to makeup and skincare brand. Building from this new sentiment, investors can justify a potential position in stocks like Waste Management Inc. (NYSE: WM) and even Unilever (NYSE: UL) for additional safety and predictability of cash flows.
Why Ulta Stock's Strength in Any Business Cycle Makes It a Buffett Favorite
It probably doesn’t matter whether the economy is booming or busting; consumers will likely find room in their budgets to buy the skincare and makeup they need for the month. Most investors would categorize Ulta stock as a consumer discretionary name, but that’s false.
Because of this inherent safety in the company’s product line, Ulta stock quickly became a pick for Buffett, but here’s how investors could justify it as a pick for their own capital.
The company’s financials show a return on invested capital (ROIC) rate of over 29% for the year, which value investors like Buffett always look for when analyzing a business.
Driving these returns is the company’s high gross margin of over 42.7%, which signifies market penetration and pricing power to retain more from each sale than most in the retail sector. Because of this efficiency in operations, Wall Street analysts felt comfortable forecasting up to 10.4% earnings per share (EPS) growth for the next 12 months in Ulta.
As it turns out, Buffett isn’t the only bull out for Ulta stock. Analysts from J.P. Morgan Chase & Co. justified placing a price target of up to $544 a share for Ulta. The stock would need to rally by as much as 44.2% from where it trades today to prove these analysts right.
Waste is a Business Worth Managing And a Great Investment
As long as humans populate the planet, specifically the United States, stocks like Waste Management will always have a place for investors. Having a low beta of 0.75 not only provides the low volatility investors seek during uncertain market times, but the company’s financials also provide an additional layer of safety.
Operating at a gross margin of 39.1% is impressive in its own measure, but the real juice for investors comes through the ROIC rates. Not as high as Ulta’s, but still high enough to generate the compounding effect every investor wants out of their capital, a 14.1% ROIC sets the foundation for this growth stock to continue.
Analysts at Deutsche Bank think this stock is worth up to $241 a share, which calls for a 17.3% upside from its current price.
This price target would also call for a new 52-week high in the stock, a bold call considering it has also outperformed the S&P 500 over the past 5 years.
Realizing that, no matter where the economy—or the business cycle—is at the moment, this company will always turn a profit and reinvest at high ROIC, bears bailed out of their short positions recently. Short interest for Waste Management stock declined by 4% in the past month, showing bearish capitulation.
Unilever Stock: A Safe Haven for Income and Stability Amid Market Uncertainty
Investors like to see reliable income during volatile stock markets like today’s. When it comes to Unilever stock, the answer couldn’t be clearer.
The company offers investors a $1.88 per share payout, representing an annualized dividend yield of up to 3.1% to match inflation in the United States.
This is one of those stocks directly exposed to every person's basic needs, from cleaning supplies to personal hygiene.
Demand for these products is not highly dependent on the business cycle, so once owned, it can be forgotten and rarely checked.
But here’s what those who check the stock regularly think. Analysts at TD Cowen want to see the stock trade at a valuation of up to $67 a share for their price targets, implying there is a 9.8% upside left in the stock for the coming quarters.
Having the lowest beta, at only 0.2, on this list also makes Unilever stock a stress reliever during rising volatility periods in the S&P 500. Investors shouldn’t be surprised if more demand for stocks like this one finds itself buying more in the coming months.