5 Defensive Stocks to Buy for 2016

U.S. stocks started 2016 with a whimper, with the major indices losing almost 6 percent of their value in the first five trading sessions. Concerns about an economic hard landing in China and continued weakness in commodity prices have dampened investor optimism and many market watchers are now taking a cautious outlook for 2016.

With this in mind, adopting a more defensive position seems prudent.

The screen. We used the Recognia Strategy Builder to search for large-cap U.S. stocks (with a market capitalization more than $10 billion) in the consumer staples, telecom services and utilities sectors. These three sectors are often thought of as defensive and should fare better than the overall market in the event of a market downturn.

To select companies that are currently well-valued, we screened for stocks with a forward price-to-earnings ratio of 25 or less. Forward P/E uses analyst estimates for company earnings in the coming year. To further refine our list, we applied a second filter to look for price-to-book ratios of less than 5.

Finally, to identify stocks with lower than average correlation to the overall market, we filtered using beta. We selected stocks with beta of less than +0.75. Beta measures the price correlation of a security compared to the entire market. Stocks with beta of less than +0.75 are in the least volatile 75 percent of the stocks in the broader market, but move in the same direction.

Procter & Gamble Co. (ticker: PE). Dow stalwart Procter & Gamble makes our list with a market cap of more than $200 billion, a forward P/E of 20 and a beta of 0.59. After having fallen 11 percent in 2015 due mainly to the headwind of a high U.S. dollar, PG stock rallied in the final months of the year as investors embraced its 3.5 percent dividend and long-term stability. This stock appears poised to weather any potential market downturn better than the broader market. In addition, any weakening in the dollar would be a welcome tailwind for the company's earnings.

Duke Energy Corp. (DUK). Duke, headquartered in Charlotte, North Carolina, is the largest utility company on our list with a market cap of $48.9 billion. Duke is the largest electric power holding company in the U.S., with operations in many states, Canada and Latin America. Duke Energy has an attractive 4.6 percent dividend yield and appears well-valued with a forward P/E ratio of 15.3 and a price-to-book ratio of just 1.23. The stock also has extremely low volatility with a beta of 0.46.

ConAgra Foods (CAG). ConAgra is a maker of packaged foods under a number of well-known brands, including Hunt's, Healthy Choice, Bertolli and Orville Redenbacher's. At the end of December, ConAgra released quarterly results that exceeded analysts' expectations for earnings, but missed on revenue. The stock price has moved in a narrow band over the past four months and reacted little to these results. The company is committed to a strong dividend policy and has a dividend yield of 2.5 percent.

CenturyLink (CTL). Headquartered in Monroe, Louisiana, CenturyLink operates as a local exchange carrier, an ISP and also provides long distance services. CTL stock has a very strong dividend yield of 9 percent and a reasonable forward P/E of just 9.6. The company's stock price has been hurt in the last 12 months by decreasing landline phone revenues and increasing competition from cable companies. However, demand for broadband data services remains high, giving the company opportunity to grow.

Southern Co. (SO). Southern Company is an electric utility holding company based in Atlanta. The company is one of the largest producers of electricity in the U.S. and has attractive fundamentals. With beta of just 0.21, this stock should resist significant market downdrafts. The 4.6 percent dividend yield makes this stock attractive to patient investors who wish to remain in the market, but be prepared for any stock market correction.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton of Recognia is a blogger for The Smarter Investor. You can follow him and Recognia on Twitter at @Recognia_Peter and @Recognia.