As we leave behind a forgettable year, one thing is certain — the Federal Reserve is still on the offensive. This means that a high-interest rate environment will accompany us throughout 2023 as the Fed tries to constrict the economy and tame inflation. This is making investors nervous about a recession, which is now a question of “when” rather than “if.”
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Such a predicament calls for keeping your portfolio safe with stocks that are relatively safe from inflationary and recessionary environments. To that end, here are two such defensive stocks— UnitedHealth (NYSE:UNH) and Merck & Company (NYSE:MRK).
UnitedHealth
Healthcare services provider UnitedHealth has managed to keep its top line growing with new deals, enhanced service offerings, and renewed agreements. With a market capitalization of $495 billion, the company is one of the world’s largest revenue generators.
Shares of the company climbed 6.91% in 2022, handily outperforming the S&P 500. The company expects to generate $324 billion this year, in line with the Street consensus. This will be about 12.6% higher than the previous year’s sales.
UnitedHealth’s health services and international business offer significant diversification benefits to investors, shielding it from stringent U.S. regulations. Meanwhile, the company’s balance sheet is reasonably leveraged. Even though long-term debt of $45.4 billion outpaced cash and short-term investments of $42.5 billion, the cash was enough to fulfill short-term obligations of $3.2 billion as of September 30, 2022. This keeps the company well-capitalized to invest in growth activities.
Is UNH a Buy or Sell?
Bulls are running on Wall Street for UNH stock, with a Strong Buy rating based on 11 Buys and three Holds. The average price target of $602.64 indicates a 14.41% upside potential to the current price level.
Merck
Pharmaceutical giant Merck has been a frontrunner in 2022, with shares surging 49%. Known mainly for its cancer drugs like Keytruda and vaccines like Gardasil, Merck’s continued growth into new indications and early-stage settings are expected to keep driving long-term sales.
The company’s cost-restructuring program, which was announced in 2019, has largely helped weather the inflation this year and is likely to keep driving margins next year as well. The cost-optimization plan included the reduction of its global real estate footprint. The program is on track to be completed by 2023 and achieve net cost savings of about $900 million by the end of 2023.
Is MRK a Buy or Sell?
Cantor Fitzgerald analyst Louise Chen notes that the distinctive risk-reward ratio seen in pharma, biopharma, and biotechnology this year is likely to continue in the first half of 2023. The analyst emphasized that Merck is her top pick in the area of large-cap pharma, reiterating a Buy rating on the stock with a price target of $135.
Wall Street agrees with Chen, with a Strong Buy consensus rating based on 12 Buys and four Holds. The average price target of $114.8 indicates an upside of 4.11% over the next 12 months.
The Takeaway
Every market downturn has unique challenges. However, there was very little left to comprehend in the great bear market of 2022. Inflation, high borrowing rates, war, a pandemic, — you name it, and 2022 experienced it.
I say the companies that could grow through the rubble left behind by the year can survive the largely-predictable recession of 2023. As dominant names in the healthcare sector, UnitedHealth and Merck are well-positioned to uphold shareholder value through 2023 and beyond.
