Talk about a mixed market! The headline stock indexes fell again Thursday, with the S&P 500 index clocking its sixth decline in a row. And yet, if you had your money concentrated in defensive stocks, you could be forgiven for asking, “What’s all the fuss about?”
Companies that make consumer staples (food, beverages, soaps, etc.) are doing fine. Indeed, the Consumer Staples Select Sector Spyder (NYSE:XLP), an exchange-traded fund I’ve recommended as a Niche Investment, ticked up slightly today. It stands only 0.5% below its high for the year, registered July 3.
Likewise, utility shares, represented by the Utilities Select Sector Spyder (NYSE:XLU), another ETF we’re tracking in the Niche category, gained ground despite the general market downdraft. XLU is also less than 1% from its yearly peak, touched July 2.
Drug stocks, too, were in the pink of health today. Niche holding iShares Dow Jones U.S. Pharmaceuticals Index Fund (NYSE:IHE) surged the equivalent of more than 100 points on the Dow Jones Industrial Average!
While it’s heartening to see our defensive workhorses performing so well, I’m always wary of “too much of a good thing.” Most staples, utilities and pharmaceuticals are rather expensive now, by historical standards. I wouldn’t necessarily do a lot of selling in here, but I definitely wouldn’t add a lot of money to these sectors at current prices.
Especially, I wouldn’t leap at favorable company news as an excuse to chase stocks that have run up sharply in recent sessions. I’ll give you two fresh examples from today’s trading.
After the close Wednesday, Merck (NYSE:MRK), a member of our Incredible Dividend Machine, announced strong trial results from its Odanacatib osteoporosis drug. The shares spiked 4%.
That’s a bit rich when you consider that Odana isn’t likely to receive final FDA approval until sometime in 2014. Merrill Lynch predicts worldwide sales will reach $500 million annually by 2019. Hardly enough to justify a one-day increase of $5 billion in Merck’s total market value!
As I’ve said before, buy MRK on pullbacks only.
Another of our companies that attracted a buying frenzy today was Procter & Gamble (NYSE:PG). It turns out that activist hedge-fund manager Bill Ackman has bought a stake in the maker of Tide, Pampers and Gillette razor blades.
I’m pleased, certainly, that PG will have a persistent gadfly like Ackman needling management to do a better job. But Ackman isn’t about to stage a boardroom coup. Procter is way too big for that (market value $174 billion). Thursday’s 3.7% surge in the stock was overdone.
Fortunately, PG is still within a reasonable value range, and boasts a current yield of 3.5%. We’re monitoring Procter among our Growth & Income Plays in the main model portfolio.
P.S. If you’re shooting for a higher return over the long pull, go with our two latest industrial picks, Dover Corp. (NYSE:DOV) and Emerson Electric (NYSE:EMR).
They may fluctuate more, in the interim, than defensive names like MRK and PG. But your ultimate reward is likely to be greater — on the order of 12%-15% annually, including dividends as well as capital appreciation, over the next five years.