We recently published a list of 15 Best Defensive Stocks Amid Market Volatility In this article, we are going to take a look at where PepsiCo Inc. (NASDAQ:PEP) stands against other best defensive stocks amid market volatility.
With ongoing inflation, economic uncertainty, and global tensions, more investors are looking for ways to protect their money while still earning steady returns. Defensive stocks have historically provided such resilience. These stocks, characterized by their stability and ability to generate consistent returns, offer an attractive investment strategy during periods of market turbulence. They typically belong to sectors such as consumer staples, telecom, healthcare, and utilities which are the industries that maintain steady demand regardless of economic conditions. As investors seek ways to protect their portfolios from downturns, defensive stocks emerge as a crucial component of a well-balanced investment strategy.
That said, the investing landscape has evolved dramatically over the last two decades and the well-known defensive sectors are not as defensive as they used to be. To make this point clear, we refer to a March report by investment management firm T. Rowe Price where investment experts discussed portfolio construction and the sectors likely to outperform during a broad market downturn. They highlighted consumer staples, health care, and utilities as potential defensive plays. Adam Marden, one of the T. Rowe Price experts, emphasized health care’s strength, citing long-term demographic trends, a favourable cyclical outlook in health care tools, and biotech’s improving industry structure.
Adam also noted that while utilities remain defensive, rising AI-related power demands have led to speculative valuations, reducing their diversification benefits in an inflation-driven sell-off. Consumer staples can provide stability in various conditions, but historically, they have been most effective when trading at a discount to the broader market. So, while these sectors still offer defensive characteristics, investors should be careful to assess valuations and market conditions before making decisions on buying such stocks or constructing defensive portfolios.
Balancing Stability and Growth
Given the evolving nature of defensive sectors, investors need a more nuanced approach. One such approach focuses on low-volatility stocks, as highlighted by Fidelity Investments. The firm recently highlighted that stocks with lower volatility tend to decline less during market downturns compared to lower-quality stocks. While adding such stocks to a portfolio may help cushion losses in turbulent markets, it can also lead to more moderate gains in strong markets. Though lower-volatility portfolios reduce downside risk, they don’t eliminate it. Historically, portfolios optimized for risk-adjusted returns have delivered higher long-term gains but with greater fluctuations. One way to build a more defensive portfolio is by focusing on stocks with a history of stability, often due to industry positioning, competitive strength, or solid financials. These stocks can help mitigate losses during market selloffs.
Amid this evolving market environment, experts stress the importance of defensive positioning. In a March 15 interview with CNBC, Adam Parker, CEO and founder of Trivariate Research, emphasized that market positioning and expectations are currently misaligned in the market. While many investors have turned bearish, he believes there hasn’t been enough of a positioning shakeout to justify turning bullish just yet. He emphasized that companies’ upcoming earnings guidance will be crucial. If companies lower forecasts and stock prices remain resilient, it could indicate a buying opportunity. He highlighted the importance of playing more defense than offense until market conditions clarify.
Conclusion
Defensive stocks indeed play a critical role in investor portfolios, particularly during volatile market environments. While they may underperform in strong bull markets, their ability to provide stability and mitigate downside risk makes them a valuable asset for long-term investors. By focusing on companies with consistent earnings, strong financials, and a history of resilience, investors can navigate market uncertainties more effectively.
Our Methodology
To determine the 15 best defensive stocks, we began by filtering U.S.-listed companies with a market capitalization exceeding $2 billion across four key defensive sectors: consumer staples, healthcare, utilities, residential real estate, pharmaceuticals, and telecom. Next, we applied three main selection criteria: a beta of less than 1, positive EPS growth over the past three years and the upcoming financial year, and a dividend yield above 1%. From the resulting list, we identified the top 10 stocks with the highest hedge fund ownership, using data from Insider Monkey’s Q4 2024 hedge fund database. Finally, we ranked these stocks in ascending order based on the number of hedge funds holding positions in them.
Note: All pricing data is as of market close on March 21.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Is PepsiCo Inc. (PEP) The Best Defensive Stock Amid Market Volatility?
A close up of a glass of a refreshing carbonated beverage illustrating the company's different beverages.
Our next pick, PepsiCo Inc. (NASDAQ:PEP) is more than just a soft drink giant, it is a global food and beverage powerhouse. It has a diverse portfolio of brands, including Pepsi, Mountain Dew, Lay’s, Gatorade, and Quaker. With operations in over 200 countries, the company benefits from strong brand equity and a balanced revenue mix between beverages and snack foods.
On March 17, PepsiCo Inc. (NASDAQ:PEP) announced the acquisition of poppi, a rapidly growing prebiotic soda brand, for $1.95 billion. poppi is a modern functional soda that blends prebiotics, fruit juice, apple cider vinegar, and reduced sugar, catering to both cultural and wellness trends. While the acquisition aligns strategically with PepsiCo’s long-term goals, investors expressed concerns over the high valuation paid and the brand’s profitability.
Following the acquisition, Barclays analyst Lauren Lieberman downgraded PepsiCo (NASDAQ:PEP) from Overweight to Equal Weight, cutting the price target from $168 to $156. The downgrade reflects scepticism over the company’s ability to achieve a valuation re-rating, which largely depends on the performance of its U.S. snack division. The analyst sees the turnaround of Frito-Lay North America (FLNA) as a challenging task that could take several quarters to stabilize, particularly amid an uncertain macroeconomic environment. However, the analyst remains optimistic about FLNA’s long-term growth potential, expecting sustainable volume growth of 1.5%.
Despite near-term concerns, the consensus 1-year median price target stands at $164, suggesting a potential 13% upside. With its broad product portfolio and global distribution network, PepsiCo (NASDAQ:PEP) continues to innovate and adapt to evolving consumer preferences, strengthening its leadership in the food and beverage industry.
Overall, PEP ranks 6th on our list of best defensive stocks amid market volatility. While we acknowledge the potential of PEP to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PEP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
