Worried About Volatility? Check Out These Five Stocks

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No matter how bad the stock market gets, people still gotta eat.

That appears to be the thinking at Morningstar, which suggested five stocks investors could consider in volatile times, three of which are from the stock market’s food-and-beverage aisle. It’s a market sector that tends to hold up relatively well in periods of economic uncertainty.

While market volatility has been hard to find lately, excluding a rare sharp selloff last week, concerns that U.S. equities could be vulnerable have been growing. Major indexes are near record levels at a time when earnings expectations have been dropping and the latest read on GDP was tepid.

Last week’s selloff, from which equities have nearly completely recovered, may not presage further declines, but “the upside of broad market selloffs is that they can surface great buying opportunities for bargain hunters,” said Karen Wallace, a former mutual-fund analyst at Morningstar who is currently the senior editor of Morningstar.com.

“When markets sell off indiscriminately, investors tend to dump even high-quality names—those with sturdy financials and durable competitive advantages—along with everything else.”

In selecting five stocks to recommend, Morningstar screened for four- or five-star ranked names, an indication the research firm sees them as undervalued. From there, it further narrowed down the pack by only considering stocks with a wide economic “moat”—signaling advantages “that will fend off competitors for at least 20 years”—and which have a low or medium “fair value uncertainty” rating, meaning companies for which Morningstar feels it can estimate future cash flow with a higher degree of confidence.


The three food-related names are: Coca-Cola Co. KO, +0.01% , Mondelez International Inc. MDLZ, -0.02% and Starbucks Corp. SBUX, -0.02% .

Beverage giant Coca-Cola’s “unparalleled brand strength and global distribution network have allowed it to generate excess returns on invested capital despite a decade of volume declines in the carbonated soft-drink market,” Morningstar wrote, citing equity analyst Sonia Vora.

While U.S. consumers have been drinking less soda, Vora sees “significant opportunity” in overseas markets, she said, adding that its cash-flow levels “will allow the firm to continue to invest behind its brands, further entrenching its relationship with retailers.”

Thus far this year, Coca-Cola, a Dow DJIA, +0.36% component, has roughly kept pace with the benchmark S&P 500 SPX, +0.25% , with both up about 7.1% on the year.

Coffee chain Starbucks is “one of the most compelling growth stories in the global consumer space today,” Morningstar wrote, saying it was “poised for top-line growth and margin expansion through menu innovations, sustainable cost advantages, and evolution into a diversified retail and consumer packaged-goods platform.”

Morningstar noted that Starbucks faced competition in both its retail and wholesale channels but added that the company’s “strong brand equity, bargaining clout with suppliers of all kinds, and a leverageable model will help to stave off rivals.”

Starbucks has been a strong performer this year, up 10.1%, outpacing the S&P 500. It is the biggest gainer among Morningstar’s five stock suggestions.

Packaged-food company Mondelez benefits from having a “strong brand mix,” according to Morningstar, with seven lines that generate annual revenue of more than $1 billion, including Oreo and Trident gum. In addition, the company has a heavily diversified revenue base—with 30% of sales coming from North America, another 30% from emerging markets, and the rest from Europe—and it demonstrates a commitment to cost management.

Mondelez’s stock is up 3.9% in 2017.

Among the nonfood stocks, Morningstar recommended Emerson Electric Co.EMR, +0.02% and Procter & Gamble Co. PG, +0.01% .

About the former, Morningstar wrote that Emerson was a stock for “patient, long-term investors” who could wait for oil prices to recover, although it also had significant competitive advantages from its intangible assets and the difficulty of customers moving to other electric companies.

P&G, a Dow component, could be poised to rebound after expanding in a way that Morningstar suggested was too hasty. “Slimming down has allowed it to become a more nimble and responsive player in the global consumer product arena,” it wrote. The consumer-products giant—which markets such brands as Crest toothpaste, Pampers and Tide—should also benefit from a cost-cutting initiative, which Morningstar speculated could improve profitability.

Shares of P&G are up 2.4% this year, while Emerson is up 6.3%.