In tough markets there are
three types of investors; Bulls that
remain in denial, those who sit in cash, and savvy investors who
shift toward defensive stocks. Bulls are hard to find these
days, sitting on the sidelines isn't rocket science, so lets
take a few minutes to talk about developing a good defense.
First things first, what is a defensive stock? These companies
do not manufacture weapons or design body armor, they are stocks
that provide a constant performance in bull and bear markets. A
low P/E ratio, steady dividend, and low beta are the hallmarks
of defensive opportunities.
A Quick Lesson on Beta While stocks with low betas will, by
definition, miss out on some upside when the markets rise, but
they avoid the dips that hit most others. Beta is calculated by
comparing percentage changes in a company compared to percentage
changes in the market for a given period of time.
For example, a stock with a beta of 0.5 has experienced swings
half as much as the market, on average. If the market climbs
10%, the stock only gained 5%, but it works coming down as well.
When the market dropped 10%, shares only lost 5%. This is seen
in non-cyclical stocks with steady performance.
Non-cyclical stocks often offer goods and services that are
always in demand. If the economy is slowing down people are
still eating dinner when they get hungry and, despite energy
prices, probably haven't switched to candle light just yet. As
one can imagine food and utility companies weather economic
storms better than most other industries.
Selecting Defensive Stocks The logic makes sense, but selecting
the individual investments is where most run into trouble,
making stock screeners an invaluable tool. Below are a few
companies in historically defensive industries, with low betas,
low P/E ratios, and currently hold a Zacks Rank of #3 or better.
Four Defensive Stocks AstraZeneca PLC (AZN) has a beta of .36
and a P/E just under 9x. The stock is up about 5% on the year
compared to the markets, well we all know how that is going.
AstraZeneca develops and sells pharmaceuticals and vaccines.
Patients don't stop taking medicine in tough times, in fact for
prescriptions like Nexium, which treats gastrointestinal
conditions, sales may even spike.
Elizabeth Arden, Inc. (RDEN) is a cosmetics company that is
about flat for the year. Make up is another defensive industry
as The stock has a P/E under 11x and a beta of .61. Earnings
estimates have been climbing and the consensus is now a 50%
year-over-year increase for the current quarter.
Universal Corp (UVV) is trading at under 10 times earnings, and
has a beta of .6. The international tobacco processing company
has the luxury of very consistent demand in all economic
conditions.
Overhill Farms, Inc. (OFI) has more than doubled in value this
year. The frozen food supplier for prominent chain restaurants,
like Panda Express and Carl's Jr, in addition to retail and food
services. Overhill's beta is just under 0.5 and the P/E is 7.2x.
About the author:
Bill Wilton is an Editor at Zacks Investment Research for more
information please visit
http://www.zacks.com.
