'Defensive' Stocks May Be Heading for a Fall

We haven’t talked about selling stocks at a gain for quite some time. And we all know the reason why – there haven’t been many to talk about. But that doesn’t mean that there aren’t any. In fact, the markets have been up over the last week. For many who have become comfortable with their bear market portfolio, prepare to be unnerved.

The companies many investors have used as defensive plays have performed very well – compared to the rest of the market. But that doesn’t mean that these stocks will continue to move that way. If we have a new bull, things will change. And fast.

Traders like to use the word “overbought” to describe when, in their opinion, a stock has risen too fast or is overextended. Any company can become overbought, even in a bear market. The danger here is that with a new bull market, there is a very good chance that the darlings of the bear will become victims of the bull.

You’ll start hearing overbought being used to describe companies like Dollar Tree (Nasdaq: DLTR) Family Dollar Stores (NYSE: FDO) and Big Lots (NYSE: BIG). These companies have seen investors rushing in because they were “defensive.” As soon as they start looking for “growth” again, these stocks could come crashing down.

Last week should be a wake-up call – the market can start moving, and fast, without warning. What’s an investor to do? Two things.

First, it may be time for an early portfolio rebalancing. Start moving money from asset classes and stocks that have done well to others. Second, use an aggressive trailing stop strategy. It’s what we use, because it’s one of the best ways to protect your gains.

Comments

[Wrigs:]

Unless, of course, these stocks have a discretionary component to them. For example, 80%+ of BIG's customers walk in to the store without knowing what they'll find or purchase, so while BIG is extremely defensive given its discount prices and the "bargain hunting" mentality prevelant in the US consumer, it also benefits from a cyclical advantage that not all discounters share. I still like BIG at these levels when you compare its valuation (FCF yield, forward P/E, P/CF) to that of its peers.

Mar 26 12:26 PM