D-E-F-E-N-S-E
Posted
Nov 09 2007, 03:12 PM
by
Robert Walberg
I'm sure you've heard the phrase the best offense is a good defense, well given the offensive nature of the market over the past month -- the DJIA, S&P 500 and Nasdaq indices are down by 8.4%, 6.7% and 7.0%, respectively -- it might just be time to adopt a more defensive posture with your portfolio. How do we reduce risk, while maintaining exposure to the market? Simple, we lower our portfolio's beta.
As defined on the Investopedia web site, beta measures a stock's volatility in relation to the market. By definition, the market (the S&P 500) has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. When the market is racing to new highs, we want stocks with high betas that will outperform, but when the opposite is true -- as is the case now -- we want stocks that either move down slower than the overall market or, better yet, move in the opposite direction.
Put another way, it's time to reduce exposure to the high-flying momentum stocks such as Google, Apple, Chipotle Mexican Grill, Research-in-Motion, Intuitive Surgical and Amazon.com and start buying shares in market stalwarts such as Johnson & Johnson and Pepsico. The consumer staples if you will. These are the companies that make products -- paper, toothpaste, drugs, soft drinks, razor blades, beer -- that we are going to consume regardless of how high oil prices climb or how far real estate prices slide. While the pace of economic growth and/or business investment might be crucial to a company like Cisco or Intel, it doesn't mean much to Clorox and that stability of sales and earnings is crucial during turbulent market periods. If nothing else the comfort factor of owning defensive stocks at times like these allows us to sleep better at night. Maybe that's why defensive stocks have been edging higher while the rest of market has been going down the toilet this week.
Here are my 11 starters that measure up to the Steel Curtain when it comes to providing a strong defense: Johnson & Johnson, Pepsico, Clorox, Altria Group, Anheuser-Busch, CVS Caremark, Dominion Resources, Procter & Gamble, Teva Depository Receipt, Colgate-Palmolive and Newmont Mining.
Do you agree that the time has come to get more defensive or is this just another great buying opportunity for the go-go set that has been leading the market relentlessly higher over the past year? And if you think that consumer staples will outperform, which companies (other than those listed above) do you favor?
