Avoid These So-Called Defensive Stocks

by Tim Melvin | January 31, 2014 3:38 pm

I write about Piotroksi F-scores all the time, and I use them in my stock selection process for a simple reason: They work.

defensive-stocks-cpb-duk-syy[1]Finding stocks trading at low valuations with high F-scores allows me to find stocks that are cheap yet have respectable operating and financial conditions. That combination frequently leads to a higher stock price over the next year or two.

There’s another way to use this tool to help you attain market success. Use the Piotroski F-score to find stocks that have deteriorating operating conditions and financial condition and avoid them at all costs. Sometimes, the best way to make money is to not lose it.

I sat down today and took a look at some of the large-cap blue-chip stocks that investors often think of as defensive stocks, perfect for a nervous market. What I found is that some of these blue chips are far from suitable defensive stocks and could actually lead the market lower in a sustained decline.

In many ways Campbell’s Soup (CPB[2]) seems to fit right in among defensive stocks. Soup is going to sell no matter what happens in the world and might even sell more if the economy were to slip. However, the company earns an F-score of only 4, and CPB stock is far from cheap. In spite of single-digit revenue and earnings gains and no prospects for that to improve any time soon, the stock trades at 20 times earnings and more than 9 times book value. It’s a great company, and I happen to like their products, but the stock is neither safe nor cheap right now.

Duke Energy (DUK[3]) would seem to be just like other safe, defensive stocks. After all, this public utility provides electricity to more than 7 million customers around the United States. It also sports a nice 4.2% dividend yield right now. However, a close look shows us a troublesome F-score of only 2. The stock is not particularly cheap at 20 times earnings and 2 times tangible book value, which means this utility stock is vulnerable.

At first blush, Sysco (SYY[4]) seems to be one of the defensive stocks that would hold up well in a down market. The company sells food products to the restaurant business, and you’ve probably seen its trucks everywhere. However, the company has an F-score of just 3, and with the stock at 20 times earnings and almost 4 times book value the shares certainly are not cheap. SYY remains one of the more vulnerable entries among so-called defensive stocks.

Some of the traditionally defensive stocks like Phillip Morris International (PM[5]) and Merck (MRK[6]) also fail our test for operating conditions and financial changes. Yield chasers have also pushed the value of their shares to unsustainable levels, and are unlikely to see much more than mid- to low-single-digit profit growth for several years.

F-scores can help you find the winners, but they are just as handy for avoiding the potential losers that can hurt your portfolio performance.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.

  1. [Image]: https://investorplace.com/wp-content/uploads/2011/03/down-arrow1.jpg
  2. CPB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPB
  3. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  4. SYY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SYY
  5. PM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PM
  6. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK

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