On Feb. 19, the S&P 500 index closed at 3,386.15. Since then, fears of the new coronavirus (Covid-19) have gripped markets, and the beginnings of a global oil price war have made matters worse. As of midday trading on March 10, the S&P 500 is down 18.22% compared to its Feb. 19 price.
In this highly volatile market environment, investors may be wondering which types of businesses are the safest investments. While it is rare for any business to avoid some losses when markets enter correction territory, some have weathered recent storms better than others.
According to GuruFocus’ data on stocks trading near their 52-week lows, companies in the utilities, health care and metals and mining industries have seen the fewest declines to 52-week lows. The benchmark index funds for these industries confirm that, on average, these industries have seen lower declines than the S&P 500.
Utilities
The benchmark for U.S. utilities, the SPDR Select Sector Fund - Utilities (XLU, Financial) Exchange-Traded Fund, shows that utility stock prices are down an average of 12.19% on March 10 compared to Feb. 19.
GuruFocus data indicates that only 17% of regulated utilities stocks are trading within 5% of their 52-week low price.
During times of economic uncertainty, consumers often choose to limit the amount of money they spend on things they deem unnecessary, such as travelling and dining out at restaurants. On the other hand, there are certain things that most will continue to pay for.
For example, it would be difficult for people in the U.S., who are used to things like running water, electricity and air conditioning, to suddenly go without them. Thus, when it comes time to keep a tighter hold on pocketbooks, utilities can still rely on a steady stream of demand that remains relatively unchanged from previous levels.
Combined with low fluctuations in demand, utilities are also regulated to prevent both excess competition and unfair price hikes. This results in stable operations and high dividends, as these companies have limited growth opportunities and often bring in far more cash than they could allocate to expansion.
Due to their high dividends and slow growth, utility stocks are more suitable for dividend investors. Over a 10-year period, many utilities will return 100% or more to investors in dividends alone. For example, the Southern Co. (SO, Financial), which is the second-largest utility company in the U.S., returned 210% to shareholders from 2009 to 2019, only 75% of which came from share price appreciation.
Metals and mining
According to the VanEck Vectors Gold Miners (GDX, Financial) ETF, which is the benchmark for the gold mining industry, the stocks of companies that are involved in gold production are down an average of 10.51% compared to the S&P 500’s 18.22% drop.
Among metals and mining companies, those involved in the production of gold have been the most stable, as the yellow metal is often used as a safe haven asset to protect value in times of market volatility. On March 10, gold traded around $1,676.60 per troy ounce on the London bullion market at market open, which is 4% higher than the Feb. 19 price.
GuruFocus data indicates that around 17% of metals and mining stocks are trading within 5% of their 52-week low price. Among this 17%, only five out of 116 are gold producers.
On the other hand, metals and mining companies that are not related to gold production have not done as well. Many of these stocks are either somewhat out of the public eye or belong to companies that produce metals or other products that are more susceptible to volatile economic conditions (such as copper, aluminum, rare earth metals, etc.).
Thus, the iShares MSCI Global Select Metals & Mining Produce (PICK, Financial) ETF, which consists of a broader range of mining stocks, has lost 27.78% from Feb. 19 to March 10, an even sharper decline compared to the S&P 500.
In other words, while mining stocks have mostly stayed out of their 52-week low range, that doesn’t mean they are all doing better than the market. Only mining companies that produce safe haven assets such as gold are withstanding the increased market volatility.
Health care
The benchmark for U.S. health care stocks, the SPDR Select Sector Fund - Health Care (XLV, Financial) ETF, shows that health care stock prices are down 11.41% on average over the observed period.
GuruFocus data indicates that among health care stocks, 13% of drug manufacturers, 17% of health care providers, 15% of medical devices manufacturers and 16% of medical diagnostics and research companies are trading within 5% of their 52-week low price.
Like utilities, health care is another fixture of modern life that is not likely to see reduced demand, regardless of economic conditions. Thus, investors are betting on many of these companies to meet earnings expectations even when most of the market fails to do so.
As per the chart below, health care companies Johnson & Johnson (JNJ, Financial), Pfizer (PFE, Financial), CVS Health (CVS, Financial) and Gilead Sciences (GILD, Financial) all saw no unusual changes in their upwards revenue trajectory during recessions compared as compared to other macroeconomic environments.
In addition to being more recession-proof than many other industries, the health care sector also has direct ties to coronavirus volatility. Fears over the virus have investors betting on which health care company may be able to provide a cure or vaccine.
For example, Gilead is in the process of testing remdesivir, its new antiviral drug aimed at treating Covid-19. The results of the first clinical trial are expected to be released in April. As a result, share prices of the biotech giant are up 5.46% to $71.03 on March 10 compared to the Feb. 19 price of $67.35.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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