Northrop Grumman (NOC) and AutoZone (AZO) lead this weekend’s watch list of five stocks near buy points as investors increasingly look for companies whose sales and earnings can withstand a potential recession. Like the defense contractor and auto parts retailer, drug distributor McKesson (MCK), managed-care provider Centene (CNC) and Alkermes (ALKS), whose new bipolar drug is off to a fast start, are defensive plays showing relative strength in a lousy market as the Federal Reserve engineers a slowdown — or worse.
In fact, the relative strength line, the blue line in the charts below that tracks a stock’s progress vs. the S&P 500, is hitting multiyear highs for every stock on the watch list.
Northrop is part of the IBD Leaderboard portfolio of elite stocks. NOC stock has shown staying power, as the portfolio has shrunk to just six stocks as past leaders have succumbed to the bear market.
McKesson and Centene are part of the IBD 50.
Be sure, though, to read IBD’s The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.
Northrop Grumman was featured as IBD Stock Of The Day on Thursday, as a new $800 million round of U.S. military aid for Ukraine helped lift the entire sector. A potentially bigger deal for Northrop was the June 24 news it reached the next stage of the competition for a multibillion-dollar contract for missiles to intercept hypersonic weapons. That puts it head-to-head against Raytheon Technologies (RTX), while Lockheed Martin (LMT) was eliminated.
Northrop has been one of the big winners as the strategic implications of Russia’s invasion boosts defense budgets, with Biden requesting $773 billion for fiscal 2023. That includes funds for initial production of Northrop’s B-21 Raider stealth bomber and an increase in funds for developing an intercontinental ballistic missile known as the Ground Based Strategic Deterrent.
The Air Force plans to spend $20 billion for B-21 production over five years. In 2020, Northrop received a $13.3-billion contract to develop the new ICBM.
While Northrop’s revenue and EPS have trended lower in recent quarters, those and other programs are expected to fuel growth in 2023 and beyond.
Northrop Grumman stock finished the week with gusto, rising 3.6% on Thursday and 1.6% on Friday to 486.37 Thursday’s rebound off its 50-day moving average carried NOC stock past a 473.82 early entry point, 10 cents above Tuesday’s high, as well as a prior 477.36 buy point from a cup-with-handle. That entry is technically no longer valid, but a lot of NOC stock trading has been at that level in the past few months.
In another week, Northrop stock could have a flat base with a 492.40 buy point.
AZO stock is a relative safe haven during periods of economic weakness because people can’t do without their car. Already, the average car on the road is more than 12 years old, a new record according to S&P Mobility. As cars grow older, more parts outlive their usefulness. So if recession hits and consumers delay purchases, General Motors’ loss will often be AutoZone’s gain.
On Monday, Goldman Sachs analyst Kate McShane upgraded AZO stock to buy from neutral, hiking her price target to 2,296 from 1,969. She cited “relatively inelastic” demand and the ability to pass through cost inflation to customers. However, Bank of America, which has an underperform rating for AutoZone, said Friday that the company’s “higher exposure to lower-income customers than peers” could pressure sales and margins.
Still, AZO stock managed a 0.5% gain to 2,159.81 on Friday. AutoZone stock is within range of a 2,130.60 buy point from a cup-with-handle base.
As the economy softens and prospects for a fall Covid rebound have increased, the backdrop for Centene is improving. That’s largely because one of the big issues hanging over the stock this year has been a looming end to the public health emergency.
When that happens, millions who qualified for Medicaid coverage amid the initial economic shock from Covid will stand to lose coverage based on their updated income levels. Because those remaining in Medicaid will, on average, be in somewhat poorer health, per-person medical costs will rise and margins may be pinched for managed-care providers.
Yet now that the economy has taken a turn for the worse and the pandemic might also, analysts now expect the Biden administration to maintain the public health emergency into 2023. Plus, economic weakness could shift more Americans into Medicaid or the public exchanges from employer coverage, playing into Centene’s strengths.
Centene stock’s rally has gained steam since the company’s June 17 investor day, at which it raised 2022 EPS guidance by 15 cents to a range of $5.55 to $5.70.
CNC stock rose 1.9% to 86.21 on Friday, just below an 87.44 buy point from a double-bottom base.
McKesson, another defensive health care play, is the relative strength leader among IBD’s Medical-Wholesale Drug/Supply industry group. On June 7, Deutsche Bank analyst George Hill upgraded the MCK stock to buy from hold, hiking his price target to 378 from 343.
Hill cited McKesson’s “solid multiyear visibility” for double-digit earnings growth, despite the risk of recession.
A few things have turned McKesson from laggard to leader. The company exited European markets over the past year, streamlining operations. The overhang from settlements stemming from its role in distributing opioids is finally behind it. And from a growth perspective, McKesson’s U.S. Oncology purchase has opened up growth opportunities in providing higher-margin services.
MCK stock rose 1% to 329.53, closing within 3% of a 338.93 buy point from a double-bottom base. However, the tight range for McKesson stock over the past five sessions, which saw resistance around 330, could provide an earlier entry with a move above that level.
Alkermes stock has been rising on the stronger-than-expected launch of its Lybalvi drug for treating schizophrenia and bipolar disorders. On April 27, the company raised guidance for 2022 sales of the drug to the top of its prior $55-$75 million range.
ALKS stock has a cup-with-handle base going back to last October, though investors could view the two-month, 20%-deep handle as its consolidation. Either way, the official buy point would be 32.89.
However, 30.88 could provide an early entry. That’s 10 cents above the top of the range over the past five weeks, and is above nearly all the trading since late April.
On Friday, ALKS stock rose 2.5% to 30.53.
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