Questor share tip: Five top stocks to calm rising tide of fear in markets

The current plunge in equities has nothing to do with the fundamental outlook for the companies involved. It’s all about fear. Investors are worried not only about recession, but also the solvency of sovereign states.

Fears of a double-dip recession are real – but companies have already gone through sharp rounds of cost-cutting and balance sheets have been strengthened since the credit crisis. Another downturn will be grim, but businesses have the sandbags out already.

Margins calls have contributed to recent falls, as they did following the collapse of Lehman Brothers. But when assets were being dumped at the end of 2008, gold was being dumped, too. This is not the case this time.

Once the current panic ebbs away – and there were signs of bargain-hunters yesterday – fundamentals will apply again. Investors with cash can buy bargains – if you are still in the market, do not rush to sell. Defensive shares have also fallen – so now is a good time to look at some quality businesses with global footprints. These sectors include the “sin set” of booze and fags, as well as utilities, healthcare and consumer goods.

Unilever
£19.31+2p
Questor says BUY

Fast-moving consumer goods (FMCG) include non-discretionary items such as washing powder and food. There was concern during the previous recession of trading down to non-branded goods, but this was not a massive problem for Unilever.

The current headwinds involve input price rises, but recent figures have shown that the group is passing on a large amount of these. If the downturn worsens, then there could also be a fall in input costs. The oil price has already fallen substantially.

More than 50pc of sales are in emerging markets.

The shares are trading on a current-year earnings multiple of 13.6, falling to 12.4, and yielding 4.1pc. Buy.

GlaxoSmithKline
£12.43+118p
Questor says BUY

Healthcare is one of the few real bull markets you can bank on. People are living significantly longer and emerging parts of the world are growing wealthier – which means they will spend more on their health. Add to this a rising global population, and the industry is as defensive as they come over the longer term.

Like all the big pharma groups, GSK is struggling with the loss of patents on key drugs. But it is further through this process than rival AstraZeneca.

The company is trying to reduce its reliance on “white pills in Western markets” – the drugs most susceptible to falling prices and generic competition. It is trying to achieve this by building its consumer healthcare business. Trading on a current-year earnings multiple of 10.7 falling to 10 and yielding 5.7pc, the shares are a buy.

Diageo
£11.60-5p
Questor says BUY

Alcohol sales are usually relatively robust in a downturn – and Diageo’s recent share price fall has made the shares attractive. Especially as the group has a well-covered 3.8pc dividend yield.

The company owns globally- important brands and operates worldwide and its recent trading update was better than expected.

There is a headwind, especially in the UK after the smoking ban, given that many consumers are drinking at home instead of in bars, where margins are higher.

However, the shares offer solid defensive properties.

Trading on a June 2012 multiple of 13.2 falling to 11.9, the shares are a buy.

British American Tobacco
£26.59+67p
Questor says BUY

Like alcohol, tobacco producers are also defensive in a downturn.

Western markets are showing falling volumes – and there has been a price war in Spain – but new markets and price rises are taking up the slack.

Recent first-half numbers were good. The company reaffirmed that BAT was “confident” its operating margin will exceed 35pc in 2011. Prices were increased by 8pc in the first six months, but volumes fell 1pc.

Emerging market sales rose substantially, although sales in Mexico and Italy fell. Trading on a December 2011 earnings multiple of 13.2 falling to 11.9 and yielding 4.9pc, rising to 5.5pc next year, the shares are a buy.

United Utilities
565p+5
Questor says BUY

Utility companies are not immune from a downturn – but they are certainly insulated.

Businesses use less water and electricity if they are not producing goods, but a substantial amount of revenue comes from households.

United Utilities is focused on the North-West.

In a recent update, United said that current trading was in line with expectations. It also revealed that it would pay a final dividend of 20p, bringing the full-year payment to 30p a share.

United has also confirmed that it plans to increase its dividend at 2pc ahead of RPI inflation all the way to 2015.

The prospective yield is 5.7pc, rising to 6pc next year, so this is very attractive. Trading on a March 2012 earnings multiple of 15.6 falling to 14.1, the shares are a buy.