Wall Street stocks and financial markets have mostly been shrugging off record inflation levels as well as an imminent reversal of the Fed’s bond-buying program. The latest data by the U.S. Department of Labor shows that headline consumer prices, also known as the Consumer Price Index or CPI, hit a 13-year high of  5.4% year-over-year in July, higher than Wall Street expectations and the fastest pace on record since August 2008.

Meanwhile, Bank of America is now calling for a November taper in Fed purchases after the latest Federal Reserve minutes stressed that the majority of FOMC members are ready to taper this year.

Yet, the S&P 500 keeps marching forward, managing to add another 7.2% over the past 3 months to bring its total gains so far in the year to 20.8%

Perhaps a big reason why the markets remain indifferent is because there are no signs yet of a taper tantrum pushing rates sharply higher, with the 10-year Treasury yield still well off the highs to the year, down near 1.2%.

The massive rally appears to have lulled investors into a false sense of security in the collective opinion that the market will continue to rise, despite the S&P 500 sitting at record highs.

Wall Street opinion appears divided.

UBS maintains a pro-cyclical bias, expecting rates to climb further. With a strong tilt to recovery, UBS says it favors Energy (NYSEARCA:XLE), Consumer Discretionary (NYSEARCA:XLY), Financials (NYSEARCA:XLF) and Industrials (NYSEARCA:XLI).

Meanwhile, Goldman Sachs shares the Fed’s view that the price pressures are largely transitory and should subside in the coming months. However, should high inflation persist beyond six months, Goldman says companies with pricing power are likely to do well. Sectors that have historically done well in high-inflation environments are Energy, Real Estate (NYSEARCA:XLRE), Health Care (NYSEARCA:XLV) and Consumer Staples (NYSEARCA:XLP).

U.S. Inflation Rates

Nevertheless, interest in defensive sectors tends to perk up in market setups such as these. During the third quarter, the utilities sector has been especially strong, especially when considering that it is a laggard for all of 2021. Health care has also made a good third-quarter showing, while performing much better for 2021.

The health-care sector is trading at a discount to the S&P 500 while the normally cheap utilities sector has narrowed the valuation gap between it and the broader market. 

Here are our top performing defensive stocks in the utilities and healthcare sectors.

• Edison International

Industry: Electric Utilities

Share ‘‘Buy’’Ratings: 63%

Consensus Price Target: $70.36

Implied 12-Month Upside Potential: 22%

California-based power producer Edison International (NYSE:EIX) is a giant utility that generates electricity through natural gas, hydroelectric, diesel, nuclear and photovoltaic sources. Edison combines deep value as well as exposure to the decarbonisation/electrification trend. Last December, EIX hiked the dividend for a 17th increase and now sports a 4.5% yield.

Southern California Edison, one of Edison International’s subsidiaries, is one of the country’s largest investor-owned utilities, serving 15 million people in Central, Coastal and Southern California. Based in Rosemead, California, SCE not only is the primary electricity supply company in Southern California but has also consistently ranked among the top 10 utilities in the country delivering solar power to their customers since 2007.

On average, the company has been connecting an average of 3,600 solar customers to its grid every month, which works out to a customer coming online every 12 minutes. In 2020, SCE added 600 megawatts of solar energy to the grid, which is the equivalent to removing 250K cars from the road for a year.

SCE offers a ‘‘green rate’’ that allows its customer to source all their electricity needs entirely from renewable sources. In 2017, the company commissioned two new hybrid electric-gas peaker plants to accommodate peak demand and also operates a regulated gas and water utility.

• AES Corp.

Industry: Electric Utilities

Share ‘‘Buy’’Ratings: 91%

Consensus Price Target: $29.94

Implied 12-Month Upside Potential: 24%

The AES Corporation (NYSE:AES) is a Virginia-based, Fortune 500 global power company that provides sustainable energy, including thermal and renewables, to 14 countries. The company  owns and manages $40 billion in total assets. For 2020, the company projected that it derived 36% of its PTC (pre-tax contribution) from the U.S.; 31% from South America, 22% from Mexico and Central America, and the remaining 11% from Asia and Europe.

AES has been making strong progress in its transition to renewable energy, and managed to retire 1.2 GW of coal in the U.S. and Chile last quarter thus bringing its coal generation down to 29% of total output and hitting its target to lower coal generation to below 30% of its total energy output by the end of the year. AES sees coal contributing  less than 10% of its total energy output by 2030.

AES has a solid history of raising its dividends over the years which now sits at 2.44% (Fwd Yield).

• Cigna Corp.

Industry: Managed Health Care

Share ‘‘Buy’’Ratings: 91%

Consensus Price Target: $275.76

Implied 12-Month Upside Potential: 31%

Bloomfield, Connecticut-based Cigna Corporation (NYSE:CI) provides insurance and related products and services in the United States. 

The company’s Evernorth segment provides a range of coordinated and point solution health services, including pharmacy, benefits management, care, and intelligence solutions to health plans, employers, government organizations, and health care providers.

 The Medical segment offers commercial products and services, including medical, pharmacy, behavioral health, dental, vision, health advocacy programs, and other products and services for insured and self-insured customers; Medicare Advantage, Medicare Supplement, and Medicare Part D plans for seniors, as well as Medicaid plans; and individual health insurance plans to on and off the public exchanges. 

Cigna recently reaffirmed its financial guidance for 2021 and 2022.

The company maintained its previously announced full year 2021 guidance of at least $20.20 per share in terms of consolidated adjusted income from operations and also said it expects its consolidated adjusted income from operations for full-year 2022 to grow by at least ~20% YoY on a per-share basis.

Cigna has a consensus Wall Street revenue estimate of $169.3B in 2021; $179.3B in 2022 and $190.4B in 2023.

• Centene Corp.

Industry: Managed Health Care

Share ‘‘Buy’’Ratings: 85%

Consensus Price Target: $85.47

Implied 12-Month Upside Potential: 34%

Centene Corporation (NYSE:CNC) is a St. Louis, Missouri company that operates as a multi-national healthcare enterprise.Centene provides programs and services to under-insured and uninsured individuals in the United States. Its Managed Care segment offers health plan coverage to individuals through government subsidized programs, including Medicaid, the State children’s health insurance program, long-term services and support, foster care, and medicare-medicaid plans, which cover dually eligible individuals, as well as aged, blind, or disabled programs. 

CNC shares have been moving after several well known hedge funds including Maverick, DE Shaw, Glenview, Eminence, Senator Investment and SouthPoint disclosed stakes in the managed care company. UBS also reported a stake that could potentially be connected to an activist that wants to remain anonymous.

• Vertex Pharmaceuticals

Industry: Biotechnology

Share ‘‘Buy’’Ratings: 78%

Consensus Price Target: $262.14

Implied 12-Month Upside Potential: 31%

Vertex Pharmaceuticals Inc. (NASDAQ:VRTX) is Boston, Massachusetts-based biotech company that engages in the development and commercialization of therapies for the treatment of cystic fibrosis. 

The company markets SYMDEKO/SYMKEVI, ORKAMBI, and KALYDECO to treat patients with cystic fibrosis who have specific mutations in their cystic fibrosis transmembrane conductance regulator gene as well as TRIKAFTA for the treatment of patients with CF 12 years of age or older who have at least one F508del mutation in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene. 

Vertex also has a rich pipeline including drugs for Alpha-1 antitrypsin deficiency that is in Phase 2 clinical trial; VX-864, a second investigational small molecule corrector for the treatment of AAT deficiency, which is in Phase 1 clinical trial; and VX-147 that completed a Phase 1 clinical trial for the treatment of APOL1-mediated focal segmental glomerulosclerosis, or FSGS, and other serious kidney diseases. 

VRTX stock has underperformed this year with a -16.2% YTD return. However, insider buying has kept investors guessing after company CEO Reshma Kewalramani recently raised her bet on the company with the purchase of 10,000 shares valued at nearly $2M to bring her total stake to ~73.8K shares.