Recent statements from Federal Reserve officials suggest to many that it will leave interest rates higher for longer.
But that’s not the view of vaunted research firm Morningstar. “We remain of the opinion that the Fed’s done hiking interest rates,” said Morningstar chief U.S. market strategist Dave Sekera. The central bank began raising rates in March 2022.
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Morningstar economists believe inflation will moderate well into next year. And they anticipate economic growth will slow this quarter before bottoming in the second quarter of next year.
“That combination of moderating inflation and slowing economic growth will give the Fed room to take its foot off the brake and start lowering rates next year, maybe as early as March,” Sekera said.
And if Morningstar is wrong and rates do stay higher for longer?
That would raise the possibility of a recession, possibly a deep one, Sekera said. In that scenario, he’d look to own stocks in defensive sectors. That would be consumer defensive, healthcare, and utilities.
Here are five stocks he’d recommend.
Kellanova
(K) -)
Kellogg has split into two businesses -- Kellanova and WK Kellogg. Kellanova consists of the old Kellogg’s snack brands, such as Pop-Tarts, while the new Kellogg has cereals.
“We think both stocks are undervalued, but my pick is the snacks business,” Sekera said. “It has much higher growth potential, much higher margins, plus a high percentage of its sales are in the faster-growing emerging markets.”
Morningstar fair value estimate: $75. Tuesday’s closing price: $50.65.
Clorox
(CLX) -)
Sales growth has stagnated since the pandemic ended, and profit margins have dropped to the low teens Sekera points out. But Morningstar believes they’ll rise gradually to historical levels of 18% to 19% by 2031.
Clorox suffered a damaging cybersecurity breach in August. “But it’s just a temporary issue,” Sekera said. “It doesn’t impact the long-term value of the business.”
Morningstar fair value estimate: $168. Tuesday’s closing price: $124.05.
Gilead Sciences
(GILD) -), the biotechnology company
Gilead’s portfolio is focused on HIV and hepatitis, but they’re expanding into pulmonary cardiovascular diseases and cancer, Sekera explains. Morningstar analyst Karen Andersen thinks the company’s pharmaceutical portfolio is poised for growth, he said.
“Currently the payout ratio there is 50%, so I don’t think they’re going to have any problem maintaining the dividend (now 3.94% on a forward basis)."
Morningstar fair value estimate: $97. Tuesday’s closing price: $80.50
Dominion Energy
(D) -), a utility.
“Utility stocks have sold off all year, and they’ve really gotten crushed over the past two weeks,” Sekera said. “The utility sector is now trading at the greatest discount to our fair value since 2009.” But the industry’s fundamentals haven’t changed.
Dominion operates in Virginia, where population growth is faster than the rest of the country, Sekera said. “And it’s got very good growth prospects in renewable energy.”
Morningstar fair value estimate: $56. Tuesday’s closing price: $41.90.
Entergy
(ETR) -), a utility
Morningstar analyst Travis Miller thinks the company has the most attractive combination of yield, growth, and value among utilities, Sekera said.
Morningstar fair value estimate: $120. Tuesday’s closing price: $94.75.
The author of this story owns shares of Clorox.
