There is a feeling in the market these days that we are getting close to the end of the party. Since March of 2009 the Fed has supplied the punch bowl and kept it full in the form of stimulus and quantitative easing programs. Free money for a zero interest rate policy has driven the price of stocks and other assets higher for an extended period of time and investors have danced the night away.
Now we see the end of bond purchases in sight, and although the Fed is committed to keeping rates low for a long time, many think the easy money has been made and it’s a time for increased caution. I agree with the general thought, but many investors will take the wrong tactic to weather any upcoming market storms.
The old market adages would have you believe that the best way to ride out a tricky market is by going to the sectors that Wall Street deems defensive, like consumer staples, big oil and drug stocks. But seeking out these so-called defensive stocks is exactly the wrong approach.
When your look at these stocks right now using Portfolio Grader, many of these defensive stocks like AT&T (T), Exxon Mobile (XOM) and Kellogg (K) receive a “D” ranking right now and should be sold. They are far more likely to lead the way lower than protect you from a market pullback.
What investors should be doing is looking for those companies that have the very best fundamentals among blue-chip stocks. Look for companies that have strong balance sheets as well as excellent fundamentals — these are the true defensive stocks. As the market advance begins to slow, and possibly even roll over, the large institutional firms are going to be focusing on superior stocks and selling those with weak outlooks and declining prospects.
One of the true defensive stocks is biotechnology leader Amgen (AMGN). The company is still seeing excellent earnings growth with the earnings up more than 30% so far this year. AMGN stock has posted four consecutive earnings surprises, and analysts have been raising their estimates for both the fourth quarter and the full year 2014. The company’s continued strong performance is recognized by Portfolio Grader, and the stock was upgraded this week to an “A” and remains a “strong buy” right now.
Despite the large snowfalls and frigid temperatures sweeping the country, spring will be here sooner or later. That will be great news for a company like Tractor Supply Company (TSCO). People will be turning their attention to lawns, farms and ranches and this company will benefit. TSCO stock has posted four consecutive positive surprises and the estimates for 2014 have been raised in the past few weeks. As a bonus, this stock will be added to the S&P 500 next week, replacing Life Sciences Technology. The stock was upgraded by Portfolio Grader back in November to an “A” and the stock remains a “strong buy” at the current price.
Investors who are nervous about the markets should avoid the impulse to flee into sectors with weak fundamentals just because Wall Street labels them as defensive stocks. You should focus on the true defensive stocks — blue chips with superior fundamentals that are attracting buying pressure from the big money. That’s the best way to position your portfolio in a defensive posture.
Louis Navellier is the editor of Blue Chip Growth.