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.
