Buy Companies That Sell What People Need

My friends, we’ve entered a period of heightened volatility in the markets. The S&P 500 staged a 1% rally or drop every day of the last week. On Wednesday it even staged both, rallying 1% in the morning, retracing its gains in the afternoon, and then finishing the day up half a percent. Gains came and went in a matter of hours and sometimes even minutes.

Stocks in general have been choppy since the credit crisis began last summer. However, things have definitely kicked it up a notch in 2008. True, the market today is roughly where it was three months ago, but it’s been a heck of a ride getting here.

Fortunately, certain investments perform extremely well during times of great volatility. Finding them is a lot simpler than you’d think: buy companies that sell things people need.

Analysis by Philip Isherwood from the investment bank Dresdner Kleinwort shows that historically the best investments to own during times of heightened market volatility are non-cyclical businesses. Isherwood cites the top industries for these markets conditions as Tobacco, Beverages, Multi-Utilities, and Pharmaceuticals.

It makes a lot of sense. When the market in general is choppy, investors will flock to the businesses with the most stable returns. It’s no surprise that cigarettes and alcohol top the list; people who consume these products usually do so year round. And they’re even less inclined to stop drinking and smoking when life is tough.

The same goes for Utilities and Pharmaceuticals. Unless we go back to being hunter-gatherers, people will need water, electricity and medication, regardless of how the economy is doing.

If you’re looking for a broad means of playing these trends, you could buy an ETF. If you’re more into individual plays, focus on the large caps like Altria (MO), Budweiser (BUD), etc. Investors in general are favoring large cap stocks while shunning the more speculative, smaller plays.

Which sectors should you avoid? Isherwood’s got that covered too. Steer clear of the companies that typically do well during times of low volatility: the Tech, Telecom, Mining, Oil Equipment, and Life Insurance sectors.

Again, the reasoning here is simple. If people are cutting back on expenses, they’re going to stop buying iPods and fancy cell phones long before they cut back on smoking or water.

The time to go defensive is now. Buy what people need, not what they want. The last five years have been dominated by the latter group—retailers, real estate, etc. The next year will be dominated by the former— tobacco, beverages, and drugs.

Comments

[moneyking:]

Agreed. Whenever I buy a stock I evaluate if I personally would use their products/services, and under what circumstances. Sometimes some of the more stable stocks out there and for boring things right under your nose. For example: concrete

2008 Apr 28 08:06 AM

[Paul Price:]

No. That would be right under your feet.

2008 Apr 28 04:25 PM

[Tom the Mon...:]

I agree. I'd still do some fundamental analysis to confirm the stock is not over valued but most millionaires I know built wealth by creating companies that sell what people need and often have little choice in consuming irrespective of the economy or the price.

2008 Apr 28 04:54 PM

[Invester Wo...:]

Tobacco, Water, drugs (meds), etc - defensive stocks may be a good buy, but people seem to be reluctant to purchase because when they do , the profit takers come along and snatch up the gains and it is back on the bottom again. So how defensive are they after all ??? I thought Crammer said the Altria stock would be up $90 by April of this year and than he cut back to $80!!!!! It hardly gets up to 72 - combined -Altria with PMI - before it's back down to 70 -7l where it seems to spend its life.!!!! Profit takers, ie, insurance companies that have to pay out annuities and other such companies that need to have cash flow have to hire special employees to profit take as stocks generally elsewhere are down. Who wants to invest in these defensive stocks just to see the next day their money is gone and on and on it goes.
Crammer need to find another line of work. Causes too many people to lose money!!!!!!!!!! Stupid I was to listen to him !!!!!!

2008 Apr 30 04:14 PM

[truthinvesting:]

if you examine the top 20 stocks in the S&P from 1957-2003 with dividends reinvested, 18 of the 20 were either consumer goods or pharma. ONE stocks beat EVERY other stock by almost 4 times. Altria

2008 Jun 01 12:38 PM