By Jacob Sonenshine

Stockpickers face a conundrum with so many names at risk of declines. Evercore strategists screened for select stocks that can thrive no matter what the broader market does.

Most stocks have taken a hit. The S&P Composite 1500, which shows a breadth of U.S. stocks, is down 9% from its record high hit in February. President Donald Trump's tariffs, which lift import costs and force companies to raise prices, threaten to reduce economic demand.

The problem is that many companies' earnings are at least somewhat sensitive to changes in the economy. That includes some manufacturers, consumer companies, commodity producers and lenders. Even though these industries are down several percent from peaks, they still trade fairly expensively -- and are vulnerable to another drop -- given that analysts could reduce earnings expectations.

Buying "defensive" companies, or those that typically don't see a substantial hit to profits in an economic downturn, is no longer the best move. Healthcare, consumer staples and utilities on the S&P 500 have already outperformed every major index, including the S&P 1500, this year. They have become more expensive -- and less attractive -- to buy.

Defensives comprise a major portion of the broader group of stocks called "low volatility," those that move with the least volatility out of any other group.

The low volatility group has outperformed in the past three months to a degree that, historically, indicates its run is likely to end. The average return for this group in the 12 months after such strong performance dating back decades, is a 6% decline, according to Evercore.

But there are two groups worth buying, historically speaking.

One is the "efficiency group," which averages a near 9% return for the 12 months after the lowest volatility names see such strong performance for three months. That's the second highest return out of all groups that Evercore analyzed. These companies generate enough cash that they can weather an economic storm, so investors find shelter in them. They are dotted around various sectors, so they aren't necessarily as expensive as stocks in the purely defensive and low volatility areas.

The other attractive group is the cheap one, which averages a 23% 12-month return after low volatility has its three-month run. A lot of these names just become so cheap that they can't go down much more.

So Evercore combined the two groups by screening for the most efficient companies that are also trading most cheaply. The screen included Applied Materials, Epam Systems, Voya Financial, MetLife and Prudential Financial.

It also included Qualcomm, the $172 billion chip maker.

The stock now trades at 13.1 times earnings analysts expect for the coming 12 months, about 34% below the S&P 1500's 19.7 times, one of its steeper discounts to the index in the past decade, according to FactSet. It is now reflecting risk to sales and earnings, so if estimates drop only mildly, the stock may stabilize soon, especially if the economy and chip demand holds up well enough and the company continues to operate efficiently.

Efficiency is high at Qualcomm. Analysts expect just over $13 billion in earnings this year, almost 50% of its book value of equity, or total assets minus liabilities, for a return on equity that's several times the S&P 1500's expected 20% this year. This means Qualcomm is particularly efficient in leveraging its assets to produce income, helping it finance itself.

This could help the stock, as long as iPhone and electronics demand remains growing, even if mildly. Apple, one of Qualcomm's largest customers, is expected to see 3% iPhone sales growth this year.

Global Payments, the $24 billion payments processor also appeared on the list.

The stock trades at 7.7 times earnings. Sales and earnings estimates have edged lower since the start of the year, but the shares are screamingly cheap. To be sure, that's because it has seen slowing sales growth in a crowded payments processing business, but perhaps the stock is too cheap, especially because the company has begun a reorganization.

It's fairly efficient, too. Its under $1 billion in annual capital investments enables it to produce almost $3 billion in free cash flow, which is roughly in line with its expected earnings this year. As long as the business stabilizes, it will continue to pump out cash and weather any storm.

Give these stocks a look.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 20, 2025 01:00 ET (05:00 GMT)

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