Better Bear Market Buy: Energy Transfer vs. Raytheon

Stocks plunged into a bear market earlier this year, experiencing their worst first half in decades. While they have recovered from their lows, most investors are not yet convinced that this challenging market can be seen in the rear-view mirror.

With that in mind, we’ve asked some of our staff to make a buy-in plea Raytheon (RTX 0.73%) and Energy transfer (ET 0.74%) during a bear market. This is why they like these two companies.

The case for Raytheon

Lou Whiteman (Raytheon): The 2019 combination of United Technologies’ aerospace arm and defense contractor Raytheon was announced as a way for both groups of investors to diversify. The deal blended UTX’s commercial aviation-focused portfolio with Raytheon’s military prowess.

That diversification came in handy less than a year after the deal was closed. The pandemic brought commercial aviation to a standstill and the newly combined Raytheon Technologies would have suffered without Raytheon’s government contracts to fall back on.

More recently, commercial aviation has done the heavy lifting. Raytheon Technologies exceeded analyst expectations in the most recent quarter, thanks to strong demand for aircraft and engine parts. The company expects sales of its Pratt & Whitney engine division and Collins aircraft interior divisions to grow 20% to 25% this year.

Looking ahead, the commercial sector should benefit from an aviation industry projected to grow at a rate of 3% to 4% per year over the next 20 years. Raytheon should also see demand for its missiles and missile defense systems grow in the coming months as the US and its allies strive to replenish supplies depleted by the war in Ukraine.

Raytheon Technologies gives investors the opportunity to buy into a company with exposure to a range of different clients, including the Pentagon, one of the most trusted account payers during a recession.

Today, Raytheon Technologies is trading at just 19 times projected earnings and twice forecasted revenue, and pays a dividend yielding more than 2%. The stock is a quiet haven in a tumultuous market with the potential for upside in both military and commercial aviation activities. It earns a place as a staple stock in a growth or income-oriented portfolio.

The case for energy transfer

Matt DiLallo (Energy transfer): Energy Transfer gives a lot of weight to a portfolio during a bear market because it has a very resilient business model. Between 85% and 90% of the pipeline giant’s revenues come from stable fee-based contracts and other regulated fee structures. Therefore, it produces a relatively steady stream of income regardless of the market environment.

This allows the master limited partnership (MLP) to pay an attractive dividend. It currently yields about 8%, although the company pays out less than half of its cash flow to investors each quarter. That large income stream provides investors with very tangible returns during bear markets. They can use that money to buy other stocks if prices fall.

Meanwhile, Energy Transfer uses the money it has left over to strengthen its balance sheet and expand its midstream business. The company’s excess cash after making distributions rose 19% to $1.2 billion in the second quarter. It used those funds to acquire Woodford Express, finance several expansion projects and pay off additional debt.

These expansion-related investments should help Energy Transfer to further grow its cash flow in the future. That would give the MLP additional fuel to increase its already high-yield distribution, especially as its balance sheet is steadily strengthening.

Energy Transfer’s stability makes it an ideal investment in a bear market. Revenue should continue to grow so it can continue to make lucrative distribution payments. Those cash returns can dampen some of the market’s volatility, making a downturn more bearable.

A safe haven or income and stability

Raytheon and Energy Transfer are both more defensive stocks, making them ideal investments in a bear market. The big difference is that Energy Transfer offers a much higher revenue stream while Raytheon has more growth potential. Therefore, Energy Transfer is probably a better option for income-oriented investors, while Raytheon is probably more attractive to growth-oriented investors.

Lou Whiteman has no position in any of the listed stocks. Matthew DiLallo holds positions in Energy Transfer LP and has the following options: short October 2022 $8 bet on Energy Transfer LP. The Motley Fool has no position in any of the listed stocks. The Motley Fool has a disclosure policy.

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