As long as I can remember, the financial media has talked about “defensive” stocks — companies that do well in any economic climate. They often represent consumer staples, the things that people really have to buy all the time because they are intrinsic to everyday life.
However, stocks that are normally considered defensive haven’t been playing good defense, lately. There are many reasons for this. I always like to blame the Fed’s quantitative easing program for driving up stock prices well beyond their intrinsic value, and that’s certainly part of the story here.
Each of the following stocks, though, have issues specifically related to the company or stock itself.
Proctor & Gamble (PG)
Proctor & Gamble (PG) may be the mother of all defensive stocks.
The company sells just about everything we buy on a regular basis: razor blades, oral care products, laundry detergents, dish soap, diapers, toilet paper and everything in between. You can find P&G products in 180 countries, and the company has been around since 1837. In fact, I just visited the Gamble house out here in Pasadena, and they had soap bars that were about that old on display.
However, that does not mean you should hold a stock trading at 18x next year’s earnings on 6% EPS growth. You want to chase that 2.8% yield? Be my guest. But if the stock falls more than 2.8%, that dividend won’t mean a darn thing. Then we have the fact that activist fund manager Bill Ackman took a stake in P&G. Considering the drama surrounding the failure of J.C. Penney (JCP), that’s a distraction I want to avoid.
Costco (COST) is a relatively new addition to the defensive category. The company was founded in 1976, but I didn’t even hear about it until the mid-1990’s.
The theory here is that Costco sells staples that people can buy in bulk, so its kind of an extension of the staples concept, but a retailer instead of a manufacturer. It’s a great concept, a great company, with a strong balance sheet and cash flow. It’s set for 12% EPS growth next year and trades at 25x earnings.
But look, the point of a defensive stock is that in a bad economy it shouldn’t fall as much as the overall market. At 25x earnings, COST is already so overvalued that it eliminates that protection.
ConAgra Foods (CAG)
On a list of consumer staples, you can always expect food to be near the top.
ConAgra Foods (CAG) makes some hard-core low-end necessities like Chef Boyardee, Health Choice, Hebrew National, Slim Jim, Peter Pan, and Wesson. You probably have some of their products at home right now. I think the mistake the financial media makes, which investors gobble up, is using the logic that this is a hundred-year-old company that sells food, and everyone needs food, so by definition it’s a defensive stock. That isn’t a real investment thesis, though.
CAG’s 3.1% yield is not too shabby, but you can find that same yield with a lot less risk than a stock with earnings growing at 8% but trading at a P/E of 15. Contrast this with McDonalds (MCD) which pays 3.3%, and has a solid global market. My cousins own franchises, and as they say, “In a good economy, we do well. In a bad economy, we do great.” That’s a real defensive stock.
Last, we have Walmart (WMT) … or should I say “Brawl-Mart?”
That might seem like a cheap shot if you think Walmart isn’t to blame for Black Friday insanity. But the company really is to blame. What happened is unacceptable, and it has happened so many times before that management should have implemented a crisis PR long ago, along with strict security guidelines. Right there, that tells me that management has a problem. If that’s what happens on Black Friday, what else is happening behind the scenes?
The rest of the picture doesn’t look much better. The company’s growth has stalled out. Stores are reported to be a mess in certain areas. Why should I believe that there isn’t massive downside to a stock that is trading at 16x estimates on a mere 3% earnings growth, and has a number of systemic problems? That doesn’t sound very defensive to me.
The best defense with all of these stock is a good offense — sell now.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.