I’ve long believed that one of the worst strategies in the market is for investors to “rotate” into so-called defensive stocks. It’s a common piece of advice from experts, particularly in a more volatile market. The strategy sounds cautious, and even wise. In a nervous market, investors should migrate to lower-risk stocks in order to protect their capital.
There are a number of problems with that argument, however. Notably, it requires investors to time the market, which generally is close to impossible. And if it were possible — if investors could see a correction, or outright bear market coming — the proper advice wouldn’t be to buy “safer” stocks. It would be to short high-risk stocks, or profit from an inverse ETF like the ProShares Short S&P500 (ETF) (NYSEARCA:SH).
That said, there are investors for whom protection of principal is a priority, whether due to the size of the portfolio and/or the timing of retirement or other major changes. And for those investors, a more defensive investment strategy might make some sense, particularly toward the end of a nearly ten-year bull market.
But here, too, there’s a major problem. Many stocks traditionally considered defensive no longer have those characteristics. Are Procter & Gamble Co (NYSE:PG) or The Coca-Cola Co (NYSE:KO), struggling to drive any growth against intense competition, really low-risk plays anymore? Healthcare was the classic defensive industry, but cost and pricing pressures have hit that sector. Finding safe stocks in a rapidly changing economy is a much tougher task than it was even a decade ago.
Still, for investors who are concerned about a market correction in the near future, but aren’t quite ready to go to cash, there are some options. These seven stocks offer at defensive characteristics — and income. A correction could easily lead these stocks lower. But the losses should be lower than those seen in the market as a whole, even in a worst-case scenario. And over the long term all seven should be strong buys for investors preparing for retirement, whether in the near future or down the line.
Retirement Stocks to Buy for a Correction: Exxon Mobil Corporation
Exxon Mobil Corporation (NYSE:XOM) probably seems like a terrible choice for this list. After all, the price of oil generally is correlated to the economy. A weaker economy usually leads to lower oil prices, which would seem a major risk for XOM stock in a correction.
But Exxon Mobil isn’t a straight bet on oil prices. Its downstream and chemicals business actually benefit from lower oil prices. It’s why XOM stock isn’t a good play for investors betting on higher oil prices. Of course, that internal hedge is also why XOM should survive a correction relatively intact.
Indeed, as oil prices crashed starting in 2008, even amid the financial crisis, Exxon stock lost only about one-third of its value from peak to trough. And now, XOM is bouncing off a two-year low, and yields a shade under 4%. The company expects to double earnings by 2025. And even if lower oil prices mean the company misses that target, a 16x forward EPS multiple prices in limited growth to begin with.
XOM isn’t a stock that’s going to drive huge upside. But for investors looking for income and downside protection, it is a strong, if counterintuitive, choice.
Retirement Stocks to Buy for a Correction: Dollar General
Dollar General Corp. (NYSE:DG) is not only defensive — it might be actually counter-cyclical, meaning it would benefit in a downturn. Indeed, during the financial crisis, Dollar General sales growth was torrid. Comps rose 9% in fiscal 2008 (ending January 2009) and 9.5% the year after, according to a 10-K filing. Rival Dollar Tree, Inc. (NASDAQ:DLTR) saw same-store sales increase as well, though not quite at the same level.
More recently, DG has continued to perform well. As Walmart Inc (NYSE:WMT) has struggled of late, DG has strengthened. Dollar General posted an excellent Q4 report last month. This year, the company should be one of the biggest beneficiaries of tax reform. Looking forward, steady same-store sales growth and room for expansion suggest double-digit earnings growth should continue for some time to come.
And the risks here are lower than they are elsewhere. DG should be well-protected from the Amazon.com, Inc. (NASDAQ:AMZN) threat that hovers over the retail space. Low price points and a heavy proportion of necessities in terms of overall sales protects the company against an economic downturn. Again, the company thrived during the last recession, and likely will benefit from customers trading down in the next one.
DG’s one weakness is a relatively low dividend, which yields just 1.2%. But there’s room for that dividend to grow over time, particularly as capital expended on new stores begins to moderate next decade. With the stock still cheap, at just 13x EPS, and upside on the way, that low yield is more than offset by the many positives surrounding Dollar General stock.
Retirement Stocks to Buy for a Correction: Rogers Communications
Rogers Communications Inc. (USA) (NYSE:RCI) is a different take on a long-time defensive strategy. Since its ‘Ma Bell’ days, AT&T Inc. (NYSE:T) has been a classic ‘widows and orphans’ stock. Verizon Communications Inc. (NYSE:VZ), and in this day and age, even Comcast Corporation (NASDAQ:CMCSA) could be considered somewhat defensive as well. No matter the depths of a recession, consumers generally pay their phone bills and that now likely includes internet access costs as well.
But I’ve long been concerned about the “circular firing squad” nature of the U.S. wireless space, which leaves me rather skeptical toward T and VZ, even at low multiples. Cord-cutting remains one of many problems for Comcast stock. And with U.S. telecommunication stocks heavily indebted and dealing with varying questions surrounding M&A, I’m not sure they will be as safe in a correction as they have been historically.
But Canada’s Rogers Communications provides a handy substitute. RCI has the same relatively cheap valuation as its U.S. peers, trading at 11x forward EPS. 2018 guidance is for 3-5% growth in free cash flow — not torrid, but potentially better than the organic figures at U.S. rivals, excluding potential tax reform benefits.
And while the U.S. operators are looking to get bigger — AT&T trying to acquire Time Warner Inc (NYSE:TWX), Sprint Corp (NYSE:S) potentially merging with T-Mobile US Inc (NASDAQ:TMUS) — they will be taking on more debt as well. In contrast, Rogers should de-risk its story by paying down its borrowings.
RCI does have a choppy dividend, and a current 3%+ yield is well below that of T and VZ. But the stock does provide substantial income — and I expect both more safety and more potential for capital appreciation going forward.
Retirement Stocks to Buy for a Correction: Amgen
The healthcare space isn’t as safe or defensive as it used to be, but Amgen, Inc. (NASDAQ:AMGN) still should be immune (no pun intended) to a market or macro downturn.
The world’s largest biotechnology company still has an impressive pipeline, which should drive growth for years to come. As Will Healy detailed in February, there are worries about near-term revenue and profit growth. But at 12x forward EPS, Amgen is priced for that profile to continue in perpetuity. The need for new drugs isn’t going anywhere, and even with the U.S. healthcare system focused on costs, Amgen still has driven 40%+ operating margins of late.
At the same time, a recent pullback leaves AMGN looking simply too cheap. The stock sits just above support, which has held going back to last summer. The average analyst target price suggests 13% upside. And a 3%+ dividend yield offers income as well. AMGN probably isn’t the sexiest stock in the market, but it should have downside protection in the event of a correction, given its lack of correlation to the broader economy.
And long-term, given the low valuation, there’s room for capital appreciation as the pipeline matures and earnings growth begins again.
Retirement Stocks to Buy for a Correction: Sun Communities
Manufactured housing community operator Sun Communities Inc (NYSE:SUI) might seem another odd choice for this list. Housing stocks are generally cyclical, and indeed several have struggled in a more choppy market just over the past few months. Both Lennar Corporation (NYSE:LEN) and KB Home (NYSE:KBH), for instance, have pulled back 20% from January highs.
But Sun, along with peer Equity LifeStyle Properties, Inc. (NYSE:ELS), has found an interesting niche. A heavy concentration of coastal communities appeal to retirees — many of whom have safe pension, investment and/or Social Security income. The average tenant stays for thirteen years. And there’s even a countercyclical aspect to the business, as seen in the company’s results during the financial crisis.
The one concern here is valuation. SUI trades at a touch over 20x the midpoint of 2018 FFO guidance, and just off an all-time high. But investors here are paying for quality, and with a strong, diversified asset base and a 3%+ dividend yield, this REIT looks like one of the best, and the safest there is.
Retirement Stocks to Buy for a Correction: McCormick
Unlike soda or tobacco, where consumption is declining, the spices and seasonings category is growing. Millennial adoption actually is higher than that of their parents, providing a long-term tailwind. Private label competition is a concern — and could accelerate if consumers get more price-conscious — but McCormick has a private label business that would offset some of that pressure.
MKC, too, isn’t cheap. A 20x forward P/E multiple seems reasonable, but is lowered by McCormick’s heavy debt load, much of it a result of its acquisition last year of two brands from Reckitt Benckiser Group plc (OTCMKTS:RBGLY). On an EV/EBITDA basis, MKC trades at a premium to most other stocks in the sector.
But it’s a premium that is deserved. As Jonathan Berr pointed out, analysts are firmly behind the stock, and its organic growth is impressive. And with the company living up to the old-fashioned ideal of consumer staples providing defensive qualities, it’s the best pick in the sector if the market turns south, too.
Retirement Stocks to Buy for a Correction: AvalonBay
Apartment REIT AvalonBay Communities Inc (NYSE:AVB) might not be quite recession — or even correction-proof. AVB stock did struggle during the financial crisis, losing over two-thirds of its value from 2007 highs to 2009 lows.
That turned out to be a buying opportunity, however, as AVB has more than tripled since then. And AVB looks better-positioned for a correction this time around. It has less exposure to hot — and potentially bubbly — urban rental markets than peer Equity Residential (NYSE:EQR).
Millennials in particular, prizing flexibility and safety over home ownership, continue to lean toward renting apartments rather than buying houses. Indeed, as one hedge fund argued this month, it’s possible that the American focus on single-family home ownership is an anomaly based on political factors, rather than a trend that will return going forward.
And in a correction, AVB likely won’t see demand drop, if only because new housing supply remains rather thin at the moment. Investors could add actually bid AVB up, given a relatively safe yield and the possibility of potential home owners deciding to stay with renting in a more uncertain macro environment. With AVB still investing capital to drive growth, and steady profit growth over the past decade, there remain several drivers of earnings increases over the next few years. And there’s a strong enough bull case here to ride out any correction — and to expect AVB to continue its run once that correction ends.
As of this writing, Vince Martin is long shares of Exxon Mobil Corporation and McCormick & Co. He has no positions in any other securities mentioned.