Are These Seven Defensive Blue-Chips Finally a Good Buy?
What defines a defensive stock? Some common traits that are accepted by most investors include companies that sell products or services such as:
1) Food and Household Staples (people still need to eat, wash and drink)
2) Alcohol and Tobacco Stocks (people who are addicted to tobacco are likely still addicted during a recession. As for alcohol, usage often in fact goes up during recessions. Bars and taverns might see their sales go down, as people drink more at home, however)
3) Essential Communications Services (people don't generally cancel their home phone, TV feed or wireless service during recessions. They may reduce some of their expensive services, though.)
While there are other categories, such as Regulated Utilities, Health Care and Pharma, I only included the ones that Consumer spending likely has the highest impact on (as much of the rates for the other products tends to be set by the government or agencies).
Let's look at a few stocks, and see how they did recently (as well as if they are a good buy now)
Food and Household Staples
Coca-Cola (KO) is down 17.1% in the past month. Coke posted strong earnings growth in Q3, which beat Analyst's estimates. Their 2008 forecast was basically unchanged. Surprising to see this one down so far. KO should earn a little over $3/share in 2008, which is up about 10% over last year, not bad for this market. KO is now trading for less than 13x 2009 projected earnings, making this a great entry point. It's also yielding about 3.7%, which is a good cushion for any possible further downside. An absolute steal at around $40...
Proctor and Gamble (PG) is down 14.4% in the past month. I can actually see why PG might be hit, in some ways, as some of their products may fall into more of the discretionary side during recessions (some of their more expensive Gillette Razors and Beauty products, as examples). However, most of their products fall under the traditional Staple definition. PG is trading about 14x Current year earnings, making it reasonably priced for its stability and growth. If this one falls below $55, grab it.
Kraft (KFT) is down 16.9% in the past month. Most of Kraft's products would fall under the Staple definition. One interesting thing about Kraft is that they may be under pressure from some of the Generics that the various Supermarkets (such as Kroger's) offer. However, that would be minor impact on earnings, as people are still likely to shell out for Oreos. One concern may be rising "Feed" costs, but that appears to be benign for now. KFT is trading at a bit over 14x this year's projected earnings. Not rip-roaring cheap here, but if it were to fall to the $25 range, or even a bit lower, I would see this as a great long term entry point.
Alcohol and Tobacco Products
Diageo (DEO) may not be a household name, but many of its products (Johnny Walker, Guinness and Crown Royal) are. Their stock is down over 20% in the past month. A logical reason is while people may still drink during these down times, they are likely to downgrade to less expensive products. I don't totally buy that, as most people will sacrifice many things before deviating from their standard brew. Diageo offers a lovely 5.5% dividend, and is trading at about 12x Current year earnings. Try to get it in the low $50s...
Altria (MO) is not my favorite stock, as I have never invested in a tobacco company. However, it has held up quite well in the past month, only down about 8%. It has a spectacular dividend of almost 7%, and raises it regularly. At about 12x 2008 earnings, it will be a good performer for those who don't mind owning it.
Essential Communications
Verizon (VZ) has taken a good hit, down almost 20% in the past month. I think part of the fear may be that people will not use many of the expensive, higher margin services during a downtime. However, most people are unlikely to cut services, especially Internet, as they tend to stay home more during downturns. One thing to watch is their Capital expenditure ratio, to ensure that they aren't spending too much money during this period. VZ is trading at about 10x this year's earnings, which is fair, considering its growth rate and cash flow. It will be a screaming buy around $22.50, especially with its 7% dividend.
AT&T (T) has been hit slightly less than VZ, but is still down about 15% in the past month. Again, I would watch capital expenditures, especially with any High-Speed Wireless rollouts (HSPA) which can be quite capital intensive. With a dividend of 6% or more, and trading at less than 9x this year's earnings, this one does look cheap. I do suspect that it may again test its 52 week low of $21 or so, especially if it looks that capital is a bit harder to come by, so I would only recommend nibbling here...
Disclosure: Close to pulling the trigger on as many as 5 of these, but no current positions in any of these stocks.
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This article has 10 comments:
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User 13958
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27 Comments
Oct 27 12:22 PMHurrah for tobacco and booze stocks, and patiently wait and collect my dividends!
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k45
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57 Comments
Oct 27 07:57 PM-
User 138602
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129 Comments
Oct 28 12:22 PM-
notsosmart
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1221 Comments
Oct 28 02:00 PM-
Larry Bellehumeur
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65 Comments
Oct 28 02:43 PMKen - I don't mind having my spelling corrected. I hope that you were able to still enjoy the article, despite my incorrect spelling of PG.
138602 -- Thanks for your kind words. Indeed, Diageo would be one of the 5. I probably should have bought some on Friday, when it dipped below $52 (for the ADR). The reality is that Sin stocks, such as Diageo, all fair well during downtimes. Since their brands for the most part have strong leadership positions (most are in the Top 3 in their categories), I would suspect that they should weather the storm well and that most of the downside is priced into the stock. I also like Diageo for the long-term as a potential play on the Baby-Boom, as people upgrade their selection as their disposable income increases. As long as you have a decent time horizon (if you are looking at under 1-2 years, I can't help you much), I would buy this one. As I said, I should have bought last Friday!
Disclosure -- Bought VZ (last Friday, luckily before the spike), PG (at $55 today), and a 1/2 Position in KO (I think around $41.50).
Cheers and I appreciate your comments, even those about my spelling and possible grammatical errors!
Larry
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User 138602
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129 Comments
Oct 28 06:47 PM-
Dividends Anonymous
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63 Comments
My Website
Oct 29 03:27 PM-
LongShortTrader.com
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25 Comments
My Website
Oct 29 03:59 PM-
Larry Bellehumeur
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65 Comments
Oct 29 07:42 PMLong/Short -- You could be right. I did mention that Kraft was somewhat susceptible to this, as are companies such as Kimberley-Clark. Not sure if this is an issue with Coke at all (Coke's dominance is not likely to be downgraded to a local brand). With P/G, sure, there could be some drops when it comes to batteries and razors, but they have been through these downturns before, and carry a lot of clout with the retailers. A serious threat would be if Wal-Mart decided to play the Generic game to a greater extent!
thanks for both of your comments...
Larry
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paulmars
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16 Comments
Dec 02 10:34 AMOne of the less expensive 'per-use' product that you can think of and people will hardly think to cut back or switch brands on a tube of $3 toothpaste. And, they have 40% global market share and have been all around the globe for decades - they're well-entrenched in markets like China and India, where most companies are just getting their feet wet.
80% of their sales and earnings come from outside the U.S.
A true global franchise. Better than Coke, in that they sell a product that is an upgrade for health for many emerging citizens of the world, versus expense per-serving, unhealthy sugar water.
Finally, in past recessions, Colgate stock has traded at high p/e(20x-30x),once investors started crowding into the stock for flight to safety reasons. These kinds of stocks are truly a rare breed.