Conventional wisdom suggests that investors should find safe stocks to buy. Penny stocks and potential “triple-baggers” might be more exciting and a big win might provide a better story, but experts will tell you the smart play is to benefit from compounding returns in safe, stable stocks.
That general strategy is similar to that followed by Warren Buffett with Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), for instance. Buffett looks for “forever stocks,” with a portfolio that ranges from key parts of the industrial supply chain to consumer brands like The Coca-Cola Co (NYSE:KO) and Dairy Queen. Investors following that type of strategy — again, so the conventional wisdom goes — should benefit from lower volatility and larger returns over time.
Of course, there are a couple of problems with this advice.
The first is that choosing safe stocks to buy is much harder than Buffett himself has made it look. General Motors Company (NYSE:GM) was considered a “widows and orphans” stock for decades — and it went bankrupt in 2008. Investors in 1985 could have argued Dow Jones component companies Eastman Kodak Company (NYSE:KODK), GM, and Sears Holdings Corp (NASDAQ:SHLD) were among the safest plays in the market.
More recently, it simply seems much more difficult for any stock to be considered safe. Many of the world’s most valuable companies would seem to have significant downside risk. The increasing pace of technological advancements adds a new risk. And changing consumer preferences are undercutting long-held moats in that sector.
Increasingly, the idea of safe stocks seems like a relic. Investors have to be much more nimble, and much more focused, than ever before.
Safe Stocks Aren’t Safe Anymore
Generally speaking, a safe stock should have at least two key characteristics.
But what’s interesting at the moment is that a lot of the classic safe (or even defensive) stocks are struggling badly. On the consumer side, three of the biggest issues — Kraft Heinz Co (NASDAQ:KHC), Procter & Gamble Co (NYSE:PG) and Anheuser Busch InBev NV (ADR) (NYSE:BUD) — all trade at multi-year lows. Incredibly, over the last five years, all three stocks — three of the biggest consumer names in the world — have provided negative returns, even including dividends.
It’s not just consumer stocks, either. Health care stocks typically were safe stocks to buy. But drug makers like Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK) remain below their peaks from the early 2000s. Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Teva Pharmaceutical Industries Ltd ADR (ADR) (NYSE:TEVA) and Mallinckrodt plc (NYSE:MNK) have collapsed. Distributors Cardinal Health Inc (NYSE:CAH) and Owens & Minor, Inc. (NYSE:OMI) have cratered amid fears of competition from Amazon.com, Inc. (NASDAQ:AMZN).
Diversified energy plays like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) have been rangebound. AT&T Inc. (NYSE:T), an original “widows and orphans” stock, has returned 3% a year (including dividends) over the past decade.
These are all the types of plays normally considered safe stocks to buy. There should always be demand for pharmaceuticals, for gasoline, for laundry detergent, and for beer. Yet, as consumers crave smaller, independent brands, as technology pressures distributors and as regulators pressure drugmakers, the bastions of safety in the market seem to only shrink.
Are There Safe Stocks to Buy Left?
As a result, investors need to adapt. Buy-and-hold investing very well may be dead — or at least on life support. The largest stocks in the market have very real concerns. Facebook Inc (NASDAQ:FB) could dominate the internet for decades — or it could, at some point, become the next Myspace. AMZN has a sky-high valuation. What happens to Alphabet Inc (NASDAQ:GOOGL) if apps, not search, become the gateway to the Internet? How does Apple Inc. (NASDAQ:AAPL) fare if smartphones last longer — and do more?
The world is changing — and it’s changing fast. And that means, more than ever, an investor can’t look backward and simply buy a company that used to grow. Yes, Procter & Gamble has been around for 181 years. But PG stock has been a poor investment for five years and, without a major change going forward, PG stock may continue to underperform.
The answer to the struggles of traditionally safe stocks isn’t necessarily to take on risk or to pivot to high-flying tech stocks. But investors need to have clear, detailed reasons behind their investments if they’re going to pick stocks to buy.
KHC stock, for instance, looks attractive. There’s a case to be made for BUD as well — and even for PG stock, as bearish as I’ve been on that stock.
But those cases have to be more than just “these are good companies that have been around a long time”. That case was never as strong as the experts argued it was. In this day and age, no stock is truly safe — and investors need to keep that in mind.
As of this writing, Vince Martin has no positions in any securities mentioned.