The Single Best Defensive Stock You Must Buy

There’s always talk of “defensive stocks” in the market, which I’ve often wondered about. If you’re buying a portfolio of stocks to hold for the very long term, then it shouldn’t matter whether stocks are defensive, offensive, aggressive or the weakling who hides in the corner. It just matters that they’re good holds for the long term.

Right?

Well, not exactly. In piecing together such a portfolio, you’ll naturally include some large-cap names that are chosen for precisely the reason that they are defensive. That is, they perform well in good times and don’t get hammered in bad times. Generally, these stocks come from the consumer staples sector. They sell things people must have, like food and tissues and toothpaste. You can go straight to the manufacturers of those products, which I suggest, but you can also go to the premier retailer of those items. That’s Wal-Mart (NYSE:WMT).

No matter how you stack retailers against each other, at the end of the day, you want Wal-Mart in your portfolio more than Target (NYSE:TGT) or Costco (NYSE:COST). Wal-Mart has everything. Its power in retailing means it can get the most favorable wholesale pricing, which means it can undercut competitors on price. It’s a household name. It’s likely the only game in many towns. The world could come to an end, and Wal-Mart will  still be there, even after the Zombie Apocalypse.

Wal-Mart WMT

Wal-Mart is massive compared to these piddly competitors. Despite being six times larger in market cap, it’s still increasing revenues at 8%. Target isn’t even close. Sure, Costco is growing faster, but Wal-Mart is more profitable at the gross and operating levels, and Costco is more expensive on a price/earnings-to-growth ratio basis. Target is cheaper on that score, but only slightly more profitable.

Then look at the financials, particularly free cash flow, which I think is key for retailers because it shows how much money the business is generating, with which it can do what it chooses. Costco did a great job putting out $470 million of free cash flow last year. Target did even better at $3 billion. Wal-Mart? Oh, only $11 billion. Looking at valuation based on cash flow data, I use the EV-EBITDA ratio. Costco’s is over 9. Wal-Mart and Target are both at about 7.

Despite its size, Wal-Mart is still growing. And still selling everything. In football terms, it’s basically an entire defensive line that also pays a 2.8% dividend. You must have this team in your portfolio. Now.

Lawrence Meyers does not own shares of any company mentioned.


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