Get 'defensive' with consumer staple stocks as Iran war drags

As the Iran war rounds out its fourth week, Wall Street is still trying to make sense of the volatility afflicting markets (^DJI, ^IXIC, ^GSPC) and the US economy.

Powers Advisory Group managing partner Matt Powers lays out the areas investors can find opportunities in as the geopolitical conflict drags on longer, namely the defense industry.

Portfolio positioning during geopolitical turmoil is hot on investors' minds. Let's delve into how to manage them. Joining me now, Matt Powers, managing partner of Power Advisory Group for this week's FA quarter brought to you by Capital Group. Good to see you, Matt.

Hey Julie. Good morning.

So, let's talk about what's been going on and and sort of what you've been hearing from your clients, how people are feeling, um, over the last month during this war as we've seen this volatility come into the market.

Yeah. Uh, you know, I think the the best way to think about this market right now, you know, it's really not necessarily about earnings for once. It's not about the Fed. You know, it's about oil and you know, we've clearly shifted into a market that's being uh driven by geopolitics and energy like you said and very different situation than what investors were dealing with a month ago. and you know, we've got oil back above 100 and it just I think just touched 110, which I didn't think I'd ever say that, but it's not just a headline here. It's it's feeding into inflation, it's pushing rate expectations. you know, it's driving all this volatility every day and you know, we're touching bare market territory for the Dow and the Nasdaq, I think today actually. So I'm not going to pretend I'm an expert on the Straight of Hormuz. I don't think any of us necessarily are, but you know, we know where it's coming from. You got about a fifth of the world world's um oil supplies in jeopardy right now. So so I think the cleanest way to frame this is there's two paths from here. So this is what we're telling clients. One, this resolves relatively quickly, shipping normalizes, oil comes down, you know, the market probably snaps back. You know, in that scenario, you definitely don't want to be sitting on the sideline, but the other is that this just drags on and that's where it's becoming a real macro issue. I mean, you'll start thinking about higher inflation and slower growth and you know, I hate even saying stagflation, but that type of setup and I don't think the market's fully pricing all that in yet.

Yeah, and we, you know, we got, um, a taste of this in the University of Michigan, um, sentiment report that just came out and showed, you know, people aren't feeling great about how they're doing right now and they're expecting higher inflation. Um, so let's talk about what you tell people because there's not been a lot of places that have outperformed here except maybe for energy stocks, but I know that you're looking at places like defense stocks, uh, right now as maybe a place to to look at. Why?

Yeah, I mean, it's not a play on words here, but you know, you want to be a little more defensive. Um, I think with portfolio positioning and and less offense here. So, so to me, I think we're looking at a shift in leadership and positioning. We saw the broadening when we started the year and um, you know, prior to everything happening with Iran, that was continuing, but I think the approach is just you stay invested, but you you just get more selective. So defense, you you brought that up. It makes sense here. I mean, not just because of this conflict necessarily, but you know, we're in a multi-year global spending cycle and we'd like defense before this, we like him now. You know, demand stable and spending is not going to slow anytime soon. That's clear. So, you can look at Raytheon, Lockheed Martin, two companies we like. Um, both dividend growers, which we love, but you know, Raytheon's it's it's a broad-based play across aerospace and defense and they've got a big backlog so you've got some good visibility there. And then Lockheed's, they're the gold standard in missile defense. So, super consistent dividend and really predictable cash flow. So so we'd like that. We like staples. You can throw in your standard Proctor and Gamble, Pepsi, you know, Costco is is a little bit of a growth play there. and then you know, I think the underappreciated piece here is is cyber security. So if this escalates and we stay on that subject, you know, the battlefield here is not just going to be physical. I think you're going to see some digital and you know, spending there doesn't get cut. It's it's going to accelerate and we like Crowd Strike and Palo Alto. Um Crowd Strike that's the leader in endpoint security and they're growing through acquisitions very strong. and Palo Alto is more of a platform, total platform play and they they cover a pretty broad range. So, if we lump all that together, it's uh it's a good way to stay invested, um but being a little more selective and and a little more defensive with the portfolio.

I'm I do want to dig into staples a little bit because that's an interesting one. It caught my attention earlier this year because early out of the gate, it was one of the best performing groups this year. Since then it's it's not. It's still it's still up on the year, but it's um not in the top spot anymore. And I wonder if that group is particularly vulnerable at a time like this, a time of inflation, right? Um, A because their costs are going to be going up. We know, you know, to ship things around the cost of diesel and things like jet fuel are going higher. But also are people going to be, you know, maybe trading down to generics for example, or or store brands uh at this time?

Yeah, you know, with defense, it it eventually, you know, high oil prices, it's going to trickle down, inflationary pressures eventually hit the consumer. We know that. But, you know, I think and so far this year, they they're kind of middle of the pack as far performance as a sector and yes, they did have a strong start to the year but kind of peeled back. In the past few years, they've been completely out of favor. Um, with AI kind of leading the way, but you know, what we like with staples, I mean, regardless of really what's happening in the macro, they they do have some pricing power there. And you know, we're a dividend growth type firm and we we like that side of it. We like dividend growers right now. So very specifically and you know, we maybe the past year or two, you know, certainly under performance, but lower volatility and you know, it's uh you get a lot of very, like with Proctor and Gamble, very strong consistent cash flow. and we just think those are, you know, a company like that's an area that you want to, you know, about as steady as it gets where you want to be placed if you want to stay equity invested. Um, you know, Pepsi's kind of in the same boat, well diversified, more so than Coke and you know, it's a good way to dampen volatility.

Yes, and dampening volatility is definitely something that people are interested in doing right now. Matt, good to see you. Have a great weekend.

Yeah, you too. Good to see you. Thanks.