3 Low-Risk Stocks to Buy If You’re Worried About a Stock Market Crash

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The stock market is on a tear. The S&P 500 — an index tracking the 500 largest stocks in the U.S. — has recorded 60 all-time high closing prices so far this year.

Businesses are posting strong earnings on the back of price increases. And consumers are flush with cash and ready to spend. 

Economically, the job market remains robust, with lower-income workers receiving generous wage increases. 

At first glance, this appears to be a great environment for stocks. But is the market too bullish? 

As famed investor Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.” 

And taking a look just beneath the surface, we can see there are reasons to be fearful.

Spiraling inflation… supply constraints for nearly every item… millions of people left out of the workforce…

Against this backdrop, it’s understandable if you’re looking to lower your investment portfolio risk.

If that sounds like you, here are three lower-risk stocks that should be on your watchlist.

Johnson and Johnson has better credit than the government

  • Johnson & Johnson (NYSE:JNJ)
  • Price: $158.08 (as of close Dec 1, 2021)
  • Market Cap: $416.161B

Johnson & Johnson (NYSE: JNJ) is considered one of the safest stocks in the world and for good reason. The multinational conglomerate was established in 1886 and has grown to one of the largest companies in the world. 

If you’re looking for a company with a safe and conservative balance sheet, look no further. In fact, Johnson and Johnson is one of only two companies with a triple-A (AAA) bond rating from Standard & Poor’s. 

That means J&J has a better credit rating than the U.S. government! 

J&J’s diversification will keep it safe

There are multiple reasons for Johnson & Johnson’s strong credit rating. In addition to low debt levels and high cash generation, the company is well diversified across the healthcare industry. 

This industry adds another layer of security, because even if there’s an economic slowdown, people will still buy healthcare products. 

J&J’s beloved brands such as Tylenol, Johnson’s, and Band-Aid command premium pricing to generics, and many customers refuse to trade down. And with the median age in developed countries continuing to rise, J&J’s medical device and pharmaceutical businesses are well-positioned for future success. 

In the next few years, J&J’s Janssen Pharmaceuticals segment will continue to benefit from its COVID-9 vaccine. That’s because of high demand in developing countries for a single-shot dose. 

Get in while J&J is cheap

Analysts consider a stock’s beta when determining its risk level. A beta reading under 1 indicates that the stock is less reactive to market volatility. J&J’s beta is 0.72.

This combination of a conservative balance sheet and economically stable business operations makes J&J a strong candidate for investors looking to balance out the high-risk and high-beta investments that have come to define the market in recent years. 

Remember, the trade-off for lower-risk stocks is the potential for lower returns. That’s been true for Johnson & Johnson stock, and the company has underperformed the broader market in the last five years, gaining 43% versus the S&P 500’s 120%. 

The upside is Johnson & Johnson is now cheap by traditional investing metrics. Currently, shares trade at 15 times expected earnings, lower than the greater market’s multiple of 22.4 times. 

Additionally, Johnson & Johnson’s stock pays a robust dividend yield of 2.6%, two times the S&P 500’s 1.3% payout. And the company has increased its dividend by 35% during that five-year period. 

Johnson & Johnson may no longer be the growth juggernaut it was years ago, but the company can be used to add value, increase yield, and lower your overall portfolio risk. 

Microsoft provides growth and quality

  • Microsoft (NASDAQ:MSFT)
  • Price: $330.08 (as of close Dec 1, 2021)
  • Market Cap: $2.478T

It’s not often you see a growth stock on this list, which is why Microsoft (NASDAQ: MSFT) is a rare find. 

Microsoft might have missed out on the smartphone craze (unlike rival Apple). But under current CEO Satya Nadella, the company has transitioned into next-gen computing and services. 

If you’d have purchased Microsoft when Nadella became CEO in 2014, you’d now be sitting on 810% gains.

Recently, Microsoft eclipsed Apple to become the largest company in the world by market capitalization. Naturally, you’d expect Microsoft to become riskier as a consequence.

But that just hasn’t been the case. Like Johnson & Johnson, Microsoft’s beta is 0.80, lower than the overall market. 

And in the most recent quarter, Microsoft fired on all cylinders, smashing earnings and revenue estimates. 

Despite having top-line revenue of more than $168 billion last fiscal year, the company continues to post year-over-year growth rates of 22%. 

Last quarter, Microsoft’s biggest growth driver was its Azure cloud computing business, which is increasing at a 50% clip. Look for this strong growth to continue. 

Microsoft’s growth is in the cloud

Cloud computing might seem like a mature industry at this point, but there’s still significant room for growth. Self-driving cars and the internet of things will require a significant ramp-up in computing and storage functionality. 

At present, the only infrastructure providers in the cloud ready to meet this challenge are Microsoft’s Azure and Amazon Web Services. That’s unlikely to change anytime soon.

Earlier, we noted that Johnson & Johnson was one of only two companies with a pristine triple-A (AAA) credit rating from S&P.

Microsoft is the second company. 

Admittedly, credit ratings aren’t flawless predictors of equity returns. But they do show management is being prudent with investor capital. Also, companies with pristine credit ratings will pay lower interest rates on any debt they take on in the future. 

However, Microsoft’s top-tier credit rating tells a story. It was able to invest significant capital into high-growth efforts without taking out significant debt to do so. 

Microsoft’s Windows OS and Office Suite of products are cash cows that power most commercial and consumer computing devices. These cash flow-rich businesses have allowed Microsoft to invest significantly in next-gen growth areas like Azure without loading it up with debt.

Microsoft is pricey, but worth it

However, like all stocks, Microsoft has risk factors. Due to the recent stock appreciation, shares appear expensive versus the broader market. Microsoft now trades for 36 times estimated forward earnings. That’s double the market’s multiple. 

While higher valuations tend to lead to riskier investments, Microsoft remains well-positioned for long-term success and has the added benefit of a massive $60 billion share buyback plan to boost bottom-line returns. 

Additionally, Microsoft tends to beat earnings estimates, so the stock is cheaper than it appears at first glance.

Pick Like A Pro

Where to invest $500 right now

Lots of new investors take chances on long shots instead of buying shares of great companies. I prefer businesses like Amazon, Netflix, and Apple — they’re all on my best stocks for beginners list.

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That company: The Motley Fool.

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Invest with Buffett and sleep well at night

  • Berkshire Hathaway (B shares) (NYSE:BRK.B)
  • Price: $275 (as of close Dec 1, 2021)
  • Market Cap: $616.14B

After underperforming the S&P 500 in 2020 by a whopping 16 percentage points — his second year of significant underperformance — there were whispers that Berkshire Hathaway’s (NYSE: BRK.B) CEO Warren Buffett might be losing his touch. 

Analysts were confused when Berkshire neglected to buy deeply discounted stocks during the recent sell-off. After all, the company would have benefited when the market quickly rebounded.

This was a radically different approach to Berkshire’s actions after the 2007 Financial Crisis, when his famous New York Times op-ed nearly ended the market’s aggressive slide and made Berkshire billions.

But where some saw a missed opportunity, others saw wise risk management. 

Buffett later blamed special purpose acquisition companies (SPACs) for hurting Berkshire’s deal prospects. As an insurance-based company, it’s crucial that Berkshire properly manage risks. 

And when it comes to managing risk, Berkshire is in a class by itself. 

Berkshire is as safe as it gets

Berkshire Hathaway has a double A (AA) corporate rating from Standard and Poor’s. That’s the highest rating for a U.S.-based financial institution. 

The company is at little to no risk of default. And its low borrowing costs allow Berkshire to make significant profits on the difference in interest it makes both on its “float” (the money it holds to pay insurance claims) and on the interest it pays its bondholders. 

Berkshire shares are also less volatile than the overall market, due to its 0.91 beta (B shares). 

Finally, Berkshire has a diversified holding portfolio that runs the gamut from technology giant Apple to soft-drink giant The Coca-Cola Co. Berkshire’s large equity portfolio lessens its dependence on any single industry or stock, lowering its overall risk. 

Berkshire buys itself

Although observers faulted Berkshire for keeping its wallet closed during the sell-off, that wasn’t entirely the case. In fact, Buffett spent nearly $25 billion on one company alone in 2021. 

That company was Berkshire Hathaway. 

Berkshire repurchased more than 5% of its outstanding shares at depressed prices. 

To date, this year represents a return to the norm of Berkshire beating the overall market. If the current economic backdrop continues, Berkshire’s future returns should be positive. 

Berkshire’s controlled companies — notably, BNSF Railway and Berkshire Hathaway Energy — benefit from increased economic activity, supply-chain bottlenecks, and inflation. 

Next year should also be good for Berkshire’s financial interests. The Federal Reserve is finally expected to raise interest rates, which will boost the interest earned on funds at Geico and at Berkshire’s portfolio companies Bank of America, Bank of New York Mellon, and U.S. Bancorp

A final note about stocks and inflation

In the short run, stocks are riskier than fixed-income plays like bonds, but they appreciate more over the long term. Because of that, stocks are considered the safest investment to outpace inflation. 

Inflation is the biggest risk to most investors. Simply put, owning stocks is risky in the short term. But in the long term, not owning stocks is dangerous.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Jamal Carnette, CFA owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Microsoft. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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