These are the 9 top stocks investors should buy for safe and stable gains during the bear market, according to Morningstar's chief market strategist

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  • Defensive stocks have been overlooked in the easy monetary policy environment of the past few years.
  • But Morningstar’s Dave Sekera said investors should consider the stocks in the face of a recession.
  • Sekera shared the 9 top picks for undervalued defensive stocks from Morningstar analysts.

As fears of an impending recession take hold of Wall Street, investors have turned their attention to a particular group of assets that have been oft-overlooked in the easy monetary environment of the past few years: defensive stocks.

Defensive stocks — which include stocks in sectors such as utilities, consumer staples, and healthcare — tend to thrive during economic contractions because of their relative safety and stability. However, it’s exactly because of these characteristics that they also tend to underperform during periods when the economy is flourishing, despite the higher dividend yields they generally offer investors to compensate for subpar growth.

But according to Dave Sekera, chief market strategist of Morningstar, the time for defensive stocks to take center stage again has already arrived.

“Thus far this year, defensive sectors have held their value better to the downside,” Sekera said in a recent video commentary. “Sector valuations among the defensives are largely in line with a composite of the fair values of the underlying stocks that we cover in each of those individual sectors.”

He continued: “These stocks in the consumer defensive sectors have benefited as investors are becoming increasingly concerned that the US economy is weakening enough that we could soon be entering a recession, and of course earnings among the defensive sectors are less sensitive to economic variability.”

Which stocks look cheap and which look overvalued

Within the defensive stocks space, Sekera pointed out that the valuations of alcoholic-beverage manufacturers look particularly cheap. He also expects the subsector to receive another boost when pandemic restrictions ease.

“As consumers begin to venture back out into public events, we expect that consumption will shift from at-home to on-premises, and in on-premises consumption, consumers typically imbibe higher-margin branded products,” he said.

On the other hand, Sekera explained that his top healthcare picks were more idiosyncratic and based on a company’s fundamental growth potential rather than one overarching sector theme.

Finally, Sekera pointed out that while utilities stocks have “certainly provided investors with a safe haven in a turbulent market year to date,” he believes the sector is slightly overvalued. And while Sekera believes that inflation will be more controlled going forward, he cautioned that persevering levels of elevated inflation would pose high risks to utilities companies.

“Utilities are the most sensitive sector to inflation, mainly because of their mostly fixed revenues, large capital investment budgets, and borrowing needs,” he explained.

In his commentary, Sekera rounded up the nine top picks for undervalued defensive stocks from Morningstar analysts. The full group is listed below, along with each company’s ticker and market capitalization.