High quality, low volatility stocks to consider if market turmoil upends the next two months

As the market enters a historically weak seasonal period with risks of sticky inflation and dampened sentiment from recent jobs data, investors are advised to consider hedging with high-quality, low-volatility stocks. A screen identified Berkshire Hathaway (BRK.B), despite a Q2 operating earnings dip, as a potential hedge due to its 0.62 beta and B+ quality. C.H. Robinson (CHRW), with a 0.88 beta and A rating, beat Q2 EPS and received an outperform upgrade from Baird. CVS Health (CVS), boasting a 0.48 beta and A+ rating, also surpassed Q2 expectations, leading Bank of America to raise its price target, highlighting its strong performance amid industry headwinds.

Analysis

The market is facing potential headwinds entering a historically weak seasonal period, with Wolfe Research data indicating average S&P 500 declines for August and September since 1990. This seasonal weakness is compounded by macroeconomic risks, including a weaker-than-expected July jobs report and the potential for persistent inflation to keep interest rates elevated. In this context, a defensive strategy focusing on high-quality, low-volatility stocks is highlighted. A screen identified several names meeting criteria of a beta below 1, S&P quality rating of B+ or higher, and positive earnings growth expectations. CVS Health (CVS) stands out with a very low 0.48 beta and an A+ quality rating, having surged 38% this year after beating Q2 earnings and revenue estimates. Bank of America raised its price objective, implying 42% upside, citing CVS's outperformance versus peers grappling with Medicare Advantage headwinds. Similarly, C.H. Robinson (CHRW) beat Q2 EPS consensus, prompting an upgrade from Baird and a price target increase that suggests 19% upside, driven by successful cost reduction and efficiency efforts. Even Berkshire Hathaway (BRK.B), despite a 4% year-over-year decline in Q2 operating earnings, qualifies as a potential hedge with its 0.62 beta and B+ rating.

Key Decisions for Investors

• Given the market's entry into a seasonally weak period and persistent inflation risks, investors should consider increasing exposure to high-quality, low-volatility equities as a defensive hedge.
• CVS Health and C.H. Robinson warrant close attention as both have demonstrated strong recent performance by beating Q2 earnings expectations and have received positive analyst upgrades with significant implied upside.
• Despite a recent dip in operating earnings, Berkshire Hathaway's low beta of 0.62 and high quality rating make it a suitable holding for investors seeking to reduce portfolio volatility and correlation to the broader market.
• Monitor company-specific execution, particularly C.H. Robinson's cost-saving initiatives and CVS's management of healthcare utilization trends, as these are the core theses behind their recent positive analyst revisions.