Pitfalls lie all around us: Greek debt, a Chinese real-estate bubble and tepid U.S. job growth, all with the summer market doldrums just around the corner.
Those risks, plus the sheer size of the gains we've seen in one of the best bull markets for stocks in history, tell us that, at best, we'll see a market advance more moderate than the 28% increase we've enjoyed over the past year.
In this kind of setting, you'd do well to slide a big piece of your stock portfolio into what the pros call defensive names. These are the companies that sell the stuff we use day to day to cook, clean, look a little better and stock up the pantry -- in short, relatively cheap and basic stuff we'll use no matter what happens to the economy.
Think about the Ariel laundry soap and Gillette razor blades sold by Procter & Gamble (PG, news, msgs), Fritos and soda from PepsiCo (PEP, news, msgs), tissue from Kimberly-Clark (KMB, news, msgs) or Band-Aids and Purell hand sanitizer from Johnson & Johnson (JNJ, news, msgs).
Are you really going to cut out these things just because your 401k is going down again or you find yourself worrying about your job? Probably not. And if the road ahead is rocky, you'll also be glad you stocked your pantry with a few of these stocks.
| Company | Recent price | Price-earnings ratio | Company | Recent price | Price-earnings ratio |
|---|---|---|---|---|---|
$26.30 | 14.8 | $66.00 | 14.2 | ||
$29.50 | 12.6 | $13.80 | 12.8 | ||
$63.00 | 13.6 | $26.50 | 15.5 | ||
$82.40 | 15.3 | $52.20 | 12.0 | ||
$64.00 | 12.1 | $21.40 | 10.7 | ||
$62.70 | 12.0 | $64.80 | 13.0 | ||
$62.00 | 15.4 | $30.00 | 15.0 |
Ever-reliable companies
So why turn to the tried, true and boring? After all, defensive stocks aren't likely to produce buzz-worthy products or red-hot growth such as Apple (AAPL, news, msgs) or Google (GOOG, news, msgs). Putting lanolin on tissues or an extra blade on a razor is as close as they're likely to come to the iPad or the Droid.But their familiar products, easy-to-understand businesses, reliable earnings growth and steady dividends make them solid stocks whatever the economy does. They'll provide some security for investors when growth inevitably cools down -- or worse. When stock prices don't rise, you still make some money.
"Now that stocks have gone up 70% and we may return to 8% to 12% annual gains, you definitely want exposure to defensive stocks, and there are some really good ones to choose from," says Andy Corn, the chief investment officer for equities at Beacon Trust.
"As the market moves into more defensive posture, then earnings consistency is going to be key," agrees Dan Genter of RNC Genter Capital Management.
This is more than just theory:
- In the market weakness last week, stocks that did the worst were some that were relatively high-priced compared with their earnings and that pay out relatively little money to shareholders as dividends. Those with lower price-to-earnings ratios and relatively higher dividends gave up much less ground, according to Bespoke Investment Group, a market research firm.
- Defensive consumer-staples stocks are typically the best performers during the often-weak summer months. They outperformed the market 65% of the time during the past 20 years, with the best average advance of any group (5%, tied with health care stocks), says a study released last week by Sam Stovall, the chief investment strategist for Standard & Poor's.
Stovall found that a stock portfolio that shifted to defensive consumer staples and health care stocks from May through October had outperformed the S&P 500 Index ($INX) by several percentage points a year over the past 15 years. He thinks consumer staples are due to shine in today's spooky market, because investors would rather "embrace more defensive sectors than bail out of stocks altogether."