10 Best Defensive Stocks to Buy Now

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In this article, we examined the 10 best defensive stocks to buy now that offer steady returns without taking a big risk. We picked these stocks from value investing legend Seth Klarman’s stock portfolio for Q1 and our stock selection criteria is based on low beta and PE ratio. You can skip our detailed analysis of Klarman’s investment philosophy, and his portfolio moves, and go directly to the 5 Best Defensive Stocks to Buy Now.

Value investing legend Seth Klarman, the co-founder of one of the most famous hedge funds Baupost Group, continued to load up on undervalued stocks in the first quarter of 2021, doubling down on his bets on cheap and undervalued technology stocks during the first quarter. His hedge fund, which ended last year with around $30 billion in assets under management and cash on hand accounting for 31% of the entire holding, focuses more on future fundamentals instead of earnings growth figures. Klarman, who is the author of one of the most popular investing books titled Margin Of Safety, stated in last year’s investor letter that his hedge fund is busy in selling positions that reached their perceived value.

He also mentioned that selling pressure on value names has contributed to mispricing that represents a potential opportunity for long-term investors. He capitalized on that opportunity. During the first quarter, his hedge fund initiated positions in 27 stocks and added to 7 existing positions. Some of the notable holdings of Klarman’s hedge fund as of the first quarter include Intel Corporation (NASDAQ: INTC), eBay Inc (NASDAQ: EBAY), Alphabet Inc Class A (NASDAQ: GOOGL), Facebook, Inc. Common Stock (NASDAQ: FB) and Micron Technology, Inc. (NASDAQ: MU).

Klarman, 64, is generally considered among the biggest followers of value investing legends like Warren Buffett and Benjamin Graham. In a 2019 investor letter, he frankly admitted that his fund’s investing strategy that is focused on value opportunities lagged behind when compared to the broader market index. Here is how he explained lower than expected performance:

“To be sure, today’s trend-following environment has left Baupost looking flat-footed, as some of the publicly traded bargains we identify and accumulate drift relentlessly lower – even as we believe they demonstrate their underlying value in several ways,” Klarman said.

Despite lower returns in 2020, he strongly believes that value stocks will rebound, and he is certainly is right. Value stocks outshined growth stocks since last November amid expectations for economic recovery and vaccine rollout.

Founded in 1983, Klarman’s Baupost Group held $12.57 billion in the 13F stock portfolio, according to the first quarter filings with the SEC. Seth Klarman is ranked among the best hedge fund managers, with an average annual return of 20% since Baupost Group’s inception. Mr. Klarman received a degree in economics from Cornell University, and he attended Harvard University to earn an M.B.A. degree.

Besides stocks, Seth Klarman invests in several other asset classes including distressed debt, foreign equities, or bonds. Rather than following speculations, Klarman likes to wait for real investment opportunities. He always seeks to hold a huge amount of cash, particularly during a period of high volatility. He held 31% of the overall portfolio holding in cash during the pandemic year. He strongly believes in risk management strategy to survive in a volatile environment. Avoiding the risk of losses is the main theme of value investing strategy, according to Klarman.

10 Best Defensive Stocks to Buy Now

Seth Klarman of Baupost Group

While Seth Klarman’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Let’s start examining the 10 best defensive stocks to buy now, according to billionaire Seth Klarman.

Best Defensive Stocks to Buy Now

10. Fidelity National Financial, Inc. (NYSE: FNF)

Number of Hedge Fund Holders: 39

The insurance product provider Fidelity National Financial, Inc. (NYSE: FNF) is one of the best defensive stocks because of the low price-to-earnings ratio. Despite a 45% share price rally in the last twelve months, its shares are trading at a significant discount based on a PE ratio of around 7.00. The value investing legend Seth Klarman held 3.03 million shares of Fidelity National Financial. After initiating a position in the first quarter, Baupost Group sold out a 20% stake during the first quarter this year.

Like Intel Corporation (NASDAQ: INTC), eBay Inc (NASDAQ: EBAY), Alphabet Inc Class A (NASDAQ: GOOGL), Facebook, Inc. Common Stock (NASDAQ: FB) and Micron Technology, Inc. (NASDAQ: MU), Fidelity National Financial, Inc. (NYSE: FNF) is one of the best stocks to buy based on Klarman’s Q1 portfolio.

In the first quarter investor letter, Merion Road Capital Management, an investment management firm, highlighted a few stocks including Fidelity National Financial, Inc. (NYSE: FNF). Here is what Merion Road Capital Management stated:

“During the period I added to our position in Fidelity National Financial (“FNF”). FNF is the nation’s largest title insurer with a 33% market share. It was built over the last 30 years by Bill Foley, who revolutionized the industry with his emphasis on eliminating bureaucracy, utilizing technology to streamline operations, and maximizing customer service. He is well-regarded as a savvy investor and consummate deal-maker having acquired and divested multiple entities both in the title and ancillary fields. He continues to serve as the chairman of FNF with a personal stake in the company worth hundreds of millions.

While title insurance is technically insurance, it is a bit of a unique animal. Being that the insurer writes a policy based on past events, not unknowns in the future, losses are relatively small and predictable. The more data an insurer can analyze, the less likely they are to experience a claim; and the more efficiently they can analyze the data and process the application, the lower their costs will be. FNF has invested in automating its work stream through their ownership of NextAce (automated search), SoftPro (document production and closing), and multiple other cloud-based platforms. Due to these investments, FNF boasts industry leading margins and is able to attract more third party agents who can leverage their service offering.” (Click here to see the full text)

9. Verint Systems Inc. (NASDAQ: VRNT)

Number of Hedge Fund Holders: 26

The software application company Verint Systems Inc. (NASDAQ: VRNT) appears like a defensive stock amid its low share price volatility. Its low beta of 0.82 and price to earnings ratio of 20 makes it a good defensive stock pick. Baupost Group has been holding a stake in Verint Systems since the second quarter of last year. At the end of the first quarter of 2021, the firm held more than 3 million shares of Verint valued at around $138 million.

Like Intel Corporation (NASDAQ: INTC), eBay Inc (NASDAQ: EBAY), Alphabet Inc Class A (NASDAQ: GOOGL), Facebook, Inc. Common Stock (NASDAQ: FB) and Micron Technology, Inc. (NASDAQ: MU), Verint Systems Inc. (NASDAQ: VRNT) is one of the best stocks to buy based on Klarman’s Q1 portfolio.

In the first quarter investor letter, Bernzott Capital Advisors, an investment management firm, highlighted a few stocks including Verint Systems. Here is what Bernzott Capital Advisors stated:

“Verint Systems (VRNT): This customer experience software provider completed its planned spin-off of its Cognyte Software unit on February 1. The poor contribution to return for the quarter does not reflect value from the separated unit and is therefore a bit of a statistical artifact. At the end of the quarter, the company reported good results and reaffirmed targets outlined in its January 2021 analyst day as the company continues to manage its transition to a subscription software model.”

8. Veritiv Corporation (NASDAQ: VRTV)

Number of Hedge Fund Holders: 13

With a low PE ratio of 17.0, the business-to-business provider of value-added packaging products and services Veritiv Corporation (NASDAQ: VRTV) is on the list of 10 best defensive stocks to buy. The company’s strong earnings growth potential helped its share price to rally close to 200% so far this year. Seth Klarman has been holding a position in Veritiv Corporation (NASDAQ: VRTV) since 2014. At the end of the first quarter, Baupost Group held $151 million worth of stake in Veritiv Corporation.

The number of long hedge fund positions remained flat in recent months. Veritiv Corporation (NASDAQ: VRTV) was in 13 hedge funds’ portfolios at the end of March, flat compared to the prior quarter. The all-time high for this statistic is 20.

Like Intel Corporation (NASDAQ: INTC), eBay Inc (NASDAQ: EBAY), Alphabet Inc Class A (NASDAQ: GOOGL), Facebook, Inc. Common Stock (NASDAQ: FB) and Micron Technology, Inc. (NASDAQ: MU), Verint Systems Inc. (NASDAQ: VRNT) is one of the best stocks to buy based on Klarman’s Q1 portfolio.

7. Healthpeak Properties, Inc. (NYSE: PEAK)

Number of Hedge Fund Holders: 18

A fully integrated real estate investment trust Healthpeak Properties, Inc. (NYSE: PEAK) has been gaining Seth Klarman’s confidence over the past two quarters. His firm added to its existing Healthpeak Properties, Inc. (NYSE: PEAK) position by 24% during the March quarter, increasing the overall position size to $157 million. Healthpeak Properties, Inc. (NYSE: PEAK) appears like a less volatile stock based on a beta of 1.23.

The smart money was cutting their exposure. The number of bullish hedge fund positions shrunk by 4 in recent months. Healthpeak Properties, Inc. (NYSE: PEAK) was in 18 hedge fund portfolios at the end of March compared to 22 positions in the previous quarter. The all-time high for this statistic is 29.

Like Intel Corporation (NASDAQ: INTC), eBay Inc (NASDAQ: EBAY), Alphabet Inc Class A (NASDAQ: GOOGL), Facebook, Inc. Common Stock (NASDAQ: FB) and Micron Technology, Inc. (NASDAQ: MU), Healthpeak Properties, Inc. (NYSE: PEAK) is one of the best stocks to buy based on Klarman’s Q1 portfolio.

6. Theravance Biopharma, Inc. (NASDAQ: TBPH)

Number of Hedge Fund Holders: 12

With a beta of 0.90, Theravance Biopharma, Inc. (NASDAQ: TBPH) is among the 10 best defensive stocks to buy now, according to Seth Klarman. At the end of the first quarter, he held $178 million worth of position in Theravance Biopharma, accounting for 1.39% of the portfolio. Shares of Theravance Biopharma, Inc. (NASDAQ: TBPH) have been under pressure over the past year. The company is currently working on stock offering plans to raise its cash resources.

Theravance Biopharma, Inc. (NASDAQ: TBPH) was in 12 hedge funds’ portfolios at the end of March compared to 16 positions in the previous quarter. The all-time high for this statistic is 18.

Like Intel Corporation (NASDAQ: INTC), eBay Inc (NASDAQ: EBAY), Alphabet Inc Class A (NASDAQ: GOOGL), Facebook, Inc. Common Stock (NASDAQ: FB) and Micron Technology, Inc. (NASDAQ: MU), Theravance Biopharma, Inc. (NASDAQ: TBPH) is one of the best stocks to buy based on Klarman’s Q1 portfolio.

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Disclosure: None. 10 Best Defensive Stocks to Buy Now is originally published on Insider Monkey.