A recent TV ad for Dos Equis Mexican beer implores Americans to “Stay thirsty, my friends.” To individual investors, I say, “Stay safe, my friends.”
According to the San Francisco Federal Reserve, the odds of a U.S. recession in 2012 are at 50%. That’s a pretty hefty percentage — and it shouldn’t be ignored. The stock market has been in full rally mode, weaving a web that might very well be a trap.
If the economy does slow, stocks are likely to retest the lows and aggressive positions will suffer. So, investors would be wise to take a more defensive position ahead of an economic contraction.
If you believe that a recession is coming, preservation of capital should be your goal. The days of stocks delivering near double-digit returns might be a thing of the past. With interest rates so low, the opportunity to make 5% to 7% on your money in total — with the benefit of not losing money — might not be such a bad thing.
To achieve a defensive position in this market I would focus on traditional consumer staples, oil stocks and consistent dividend payers. Oil might not seem like an obvious choice, but with crude crossing $100 per barrel on Wednesday, oil companies are cheap relative to the profits rising prices can deliver.
Here are three defensive picks that fit the bill:
When stocks collapsed in the summer, there was such tight correlation that things like defense, growth, value and dividend mattered little. All stocks were lumped into the same cauldron, thanks to Europe’s debt crisis. Stocks were going down together.
Cigarette maker, Altria Group (NYSE:MO) wasn’t immune to the selling. Its shares dropped 12.5%, which simply ignored the fact that Altria would likely increase profits regardless of the economic backdrop. Smokers will smoke no matter what. Altria is a reliable business that should do well in a market focused on recession.
The good news is such correlation is beginning to dissipate. That means fundamentals matter. If a recession hits in 2012, Altria profits will feel it minimally. After all, the company delivers profits like clockwork. Over the last four quarters it has hit the Wall Street number dead on. That’s likely to continue.
For the full year, analysts expect Altria to make a profit of $2.04 per share. In 2012, the forecast is 7% growth, to $2.19 per share. At current prices, shares trade for 13.5 times current-year estimated earnings. Even better for investors is Altria’s 5.9% dividend yield.