Understanding Defensive Stocks, Pros & Cons, Examples

Such competition created first a shelf war where products had to compete against each other for top space in stores. This has now moved to the online world where shopping online has reached all industries. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.

The company is a trusted provider of complex solutions to a variety of industries, though it makes most of its revenue out of legal, corporate, and tax and accounting consultancy. It has deep roots in the newspaper business, though now it’s only a fraction of its current business model. For example, they may postpone vacations and delay the purchase of products that aren’t essential for daily living. These products might include high-end clothing, big-screen televisions, and expensive new cars. First place was claimed by the lone packaged foods industry representative, B&G Foods Inc. (BGS) [1].

While we view this shift as a temporary byproduct of the economic backdrop, we see continued opportunities for growing online penetration. Investing in defensive companies is usually a more profitable strategy for discouraged investors than abandoning the stock market. On the flip side, the generally slow growth of defensive stocks often leads to smaller gains during a bull market. When other stocks are soaring, defensive stocks are more likely to perform below the market. Looking further down the consumer defensive space, a name like Unilever is also a name that we think is particularly attractive in this environment. I think that’s a situation where they’re harnessing the potential of the emerging markets a lot better than they had in the previous years, and I think that will show in results over the next 12 to 18 months as well.

  1. This quarter, Seneca Foods experienced an increase in earnings per share, which was $3.01 in Q1 and is now $3.29.
  2. Their businesses follow known patterns through each phase of the economic cycle and thus tend to preserve value as the economy moves into a recession.
  3. Warren Buffett often invests in defensive companies, such as Coca-Cola (KO).
  4. As the name implies, they can act as a kind of protective shield that helps investors endure market downturns.
  5. In the last two decades, the company never took more than two years to recover from a crash/correction phase, and in the times of most crises, it regained lost valuation within the year.
  6. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

The return on defensive stocks is usually slow and steady, as are dividends if the company pays them, which can make it easier to predict how your investments will grow over time. That might be appealing if you’re working toward a specific financial goal or planning for retirement. Investing in defensive stocks may lower your overall risk as part of a diversified portfolio. As the name implies, they can act as a kind of protective shield that helps investors endure market downturns.

Consumer Spending

As such, they may not appeal to investors who seek rapid growth, or who are willing to take on a higher degree of risk for higher potential returns. Gold stocks (from the material sector) often outperform the market during the economic crisis, but they are more contrarian than defensive. It has performed incredibly well in most of the economic crises of the past decade or so, and even though its growth potential is relatively modest compared to the other tech stock on this list, it’s just as (if not more) reliable. The company has a portfolio of 950 grocery stores and 650 pharmacies – two things people can’t stop spending money on, no matter how tight their financial situation is. While it’s technically an industrial stock, the service it provides makes it more similar to unavoidable utilities than other industrial businesses. It’s a leader in a safe sector with minimal chance of new players disrupting the market – making it a excellent defensive stock.

Iconic Brands and Constant Cash Flows

Well-known companies include Altria Group (Marlboro cigarettes) and Diageo (Johnnie Walker and other liquor brands). According to data from FactSet, the consumer staples sector had the highest percentages of companies that cited “inflation” on their Q4 earnings calls during this period. This suggests that inflation is a key concern for many consumer staples companies this year. Consumer staples stocks typically experience modest, albeit, steady growth.

Advantages of Defensive Stocks

The Canadian banking sector is one of the most conservative and stable in the world, and as the second-largest Canadian Bank and the top retail bank in Canada, TD is as safe a financial stock can get. The company usually maintains a healthy occupancy rate, which cuts down overhead costs to a minimum and ensures healthy cash flow, which results in secure dividends. It has a lot of fingers in a lot of pies, which both exposes it and solidifies its status as a defensive stock.

Investor sentiment also shifted against this segment due to worries about how new weight-loss drugs might impact demand. While it’s never possible to perfectly predict what will shine when, there are often patterns that can give investors clues. In the current environment—with corporate earnings strength eroding, and worries growing over the market and economy—investors might want to take a closer look at stocks in defensive sectors. While no stock is completely immune to market volatility, consumer staples stocks tend to decline much less during corrections. At this time of writing, the broad-based S&P 500 index has slipped nearly 7% in the year to date, but the S&P 500 consumer staples sector is only down 4% for the same period.

However, increased competition from new drugs and uncertainty surrounding regulations mean that they aren’t as defensive as they once were. Defensive stocks are also known as noncyclical stocks because they are not highly correlated with the business cycle. Defensive stocks tend to perform better than the broader market during recessions. However, during an expansion phase, they tend to perform below the market.

Also, avoid office building REITs or industrial park REITs, which could see defaults on leases rise when business slows. We also explore the increase in social commerce, as well as greater consumer concern around issues like sustainability, product origin, business practices, and more. Finally, we examine what makes for a positive shopping experience in the post-digital age. We conclude this report with key actions for brands and retailers to take in order to manage and adapt to the ongoing shifts in consumer behavior.

These Are the Top Ten Consumer Defensive Funds

Warren Buffett often invests in defensive companies, such as Coca-Cola (KO). This sector includes companies that offer communication services through cellular, fiber-optic, fixed-line, wireless, fusion markets review and high-bandwidth networks. Their businesses follow known patterns through each phase of the economic cycle and thus tend to preserve value as the economy moves into a recession.

I believe that companies with attractive valuations and strong pricing power may offer the strongest returns potential for 2024. Companies that can raise prices or hold them steady may be more likely to meet their profit-margin forecasts. And companies https://broker-review.org/ that have invested gains in advertising and long-term brand building may have an added tailwind. He’s been looking for companies that may hold up best, within the sector, under the combined pressures of a softening economy and rising input prices.

Fidelity Select Gold Portfolio (FSAGX) is an example of a mutual fund that targets gold. Utilities, consumer staples, and healthcare represent the main defensive sectors. These sectors are considered essential and typically maintain their income streams and overall stability even when the market is volatile. The consumer staples sector encompasses makers of everyday items like packaged food, toothpaste, and dish detergent. It’s considered to be a “defensive” sector because consumers tend to still buy such products even when times are tight, and because it includes many mature dividend-paying companies. When taken together, we view the consumer defensive sector as overvalued, with the median stock trading at an 8% premium to our fair value estimates.

These are known as consumer staples, also referred to as consumer defensive. Nu Skin Enterprises (NUS) netted $494.19 based on the median of target price estimates from seven analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 33% less than the market as a whole. Tailored Brands Inc. (TLRD) was projected to net $770.97, based on dividends, plus the median of target price estimates from two analysts, less broker fees.

Stocks listed above were suggested only as possible reference points for your Dow dividend dog stock purchase or sale research process. Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago. Yet there’s also a compelling longer-term case to be made for the sector, he says.

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