We recently compiled a list of the 10 Best Defensive Stocks To Buy Now.In this article, we are going to take a look at where Centrais Elétricas Brasileiras S.A. - Eletrobrás (NYSE:EBR) stands against the other defensive stocks.
Defensive stocks tend to remain stable and less affected by economic downturns. These companies operate in sectors that provide essential goods and services, which people need regardless of the economic climate. Defensive stocks mostly include stocks of companies among utilities, consumer staples, and healthcare sectors as they provide basic necessities of life. Companies in these sectors often show less volatility, and often provide steady dividends. They usually offer a safer investment choice during periods of market uncertainty.
US Stocks Surge But Experts Remain Cautious
U.S. stocks are having a great time, which is owed to strong economic data that has reassured investors. The S&P 500 and Nasdaq 100 have seen significant gains, as they are up 4.3% and over 6% over the last 5 days on August 15, respectively. The global markets have also recovered from recent losses, and the US broader market is back from the losses it faced in the first week of August. The investor sentiment remains strong and U.S. equities are seeing continuous inflows. Additionally, Fed officials are hinting at potential rate cuts which support optimism that the U.S. economy is on track for a soft landing.
However, some experts are still concerned about the future of the US economy and markets and hold a more conservative view. According to a July report by J.P Morgan, recent market trends have benefited large, high-quality companies, especially in tech and AI, which have resulted in high market concentration. However, maintaining this momentum in the second half of 2024 could be difficult due to high valuations and investor positioning. The report says that while U.S. market volatility is currently low, it could rise if conditions change.
According to Bruce Kasman, global growth is steady at 2.4%, with improved recoveries in Western Europe and emerging markets, along with a rebound in the manufacturing sector. Despite this, core global inflation is projected to remain around 3% in 2024, which could limit the potential for policy easing. Kasman warned that achieving inflation control and rate normalization might weaken demand and could interact with political factors to cause further inflation and central bank tightening.
Leon Cooperman’s Perspective on the Current Conditions
On August 15, Omega Advisors chairman and CEO, Leon Cooperman shared his perspective on the current economic outlook with CNBC Money Movers. Cooperman expressed a cautious outlook on the economy, which is driven by two main factors. First, he is alarmed by the rapid increase in the U.S. national debt, which has doubled from about $17 trillion in 2017 to approximately $34-35 trillion today. He said that this level of debt growth, which outpaces economic growth, is unsustainable and could lead to a fiscal crisis. However, the exact timing of such a crisis is uncertain. He further added that neither political party is addressing this looming issue.
Secondly, Cooperman compared today’s market conditions to past periods of financial excess, such as the Nifty 50 era in the 1970s, when companies with extremely high valuations eventually went bankrupt. He noted that during those times, the 10-year bond yield was 6.5%, much higher than the current rate of around 3.9%. He believes that if the current bond rate is appropriate, market valuations aren't too high. However, he suspects that interest rates are too low and anticipates a rise in long-term rates, particularly the 10-year Treasury yield.
While he expects the Federal Reserve to cut short-term rates, which could ease borrowing costs, he believes long-term rates will increase, leading to a decline in bond prices and potentially putting downward pressure on stock valuations. If long-term rates rise significantly, it could make the stock market less attractive and could possibly result in a market decline.
Even though the current year has shown healthy markets with a couple of corrections, Leon Cooperman’s expectations from the markets cannot be ignored. Cooperman has a track record of being one of the most successful investors of the past several decades. If they hold out to be true, investors might look toward more defensive sectors of the market.
Our Methodology
For this article, we used stock screeners to identify over 50 large to mega-cap stocks from defensive sectors such as consumer staples, utilities, and healthcare. We narrowed our list to 10 stocks with positive analyst sentiment and the highest average analyst price target upside as of August 16.
A sprawling hydroelectric power plant nestled high in the mountains.
Average Analyst Price Target Upside as of August 16: 43.23%
Centrais Elétricas Brasileiras S.A. - Eletrobrás (NYSE:EBR) is the largest power utility company in Latin America and one of the largest in the world. With a generating capacity that constitutes 23% of Brazil’s total, the company focuses heavily on clean energy, with 97% of its capacity derived from low greenhouse gas emission sources.
Up until 2022, the Brazilian federal government held over 50% of Eletrobrás’ (NYSE:EBR) shares, which were reduced to nearly 40% in 2022, adding international investors such as GIC Private Limited and the Canada Pension Plan Investment Board. Nevertheless, the company’s voting structure ensures that the federal government retains majority control over the company.
According to the company, it had an installed generation capacity of 44,654.5 megawatts (MW), making up 22% of Brazil's total capacity, by the end of 2023. The capacity distribution includes 65% from fully owned projects, 33% from Special Purpose Entities (SPEs), and 2% from joint ventures. The company increased its capacity by 2,095 MW in 2023, including new additions and consolidations, though it also experienced a 128 MW decrease due to a share swap.
Eletrobrás’ (NYSE:EBR) capacity is predominantly low in greenhouse gas emissions, with 94.6% derived from hydroelectric sources. It holds 36% of Brazil's low-emission capacity. In early 2024, the company sold its coal and natural gas thermoelectric assets as part of its commitment to achieving net zero emissions by 2030.
Eletrobrás (NYSE:EBR) has been covered by 10 analysts and all of them maintain a Buy-equivalent rating on the stock. The average price target of $10.68 represents a 43.23% upside to August 16 levels, making it the 3rd best defensive stock to buy now.
On July 17, Goldman Sachs started coverage of Eletrobrás (NYSE:EBR) with a Buy rating and a target price of $10 per share, as reported by The Fly. The firm believes that utility companies in Brazil are currently undervalued and it sees a good chance for the company to invest in new projects with promising returns. The firm noted that Eletrobrás (NYSE:EBR) and another recently privatized company, Copel, are expected to reduce costs and improve their operations, and they could increase shareholder returns with higher dividends in the next year.
Overall EBR ranks 3rd on our list of the best defensive stocks to buy. While we acknowledge the potential of EBR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EBR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
