How Have 'Traditional Defensive Stocks' Done in This Downturn?

Like many people on Seeking Alpha, I tend to watch a lot of Business-related programming on Bloomberg and BNN (Canada).  Over the past few months, more and more Analysts and Fund Managers are telling the viewers to “get more defensive” in their portfolio.  When asked which stocks the viewers should be looking, most of them listed off what I would call “Traditional Defensive” stocks

"Traditional Defensive" stocks are ones that are unlikely to see a huge drop in earnings, regardless of the state of the economy.  The reason is that they are either things that people cannot live without (food, toiletries, household products and even low-cost fast food) or that are extremely price-regulated (utilities and pipelines).

Well, the S&P has seen a significant drop from its high of 1576.09 on October 11, to a close of 1,289.19 on August 6^th (an 18.2% drop).  While we are up from the recent low of about 1200, we are still close to being in bear territory today.  I began to wonder…..how have “Traditional Defensive” stocks held up during this correction?

I’ve divided up some stocks into what history has told us are "Classic Defensive" sectors:

1. Big Cap Pharma
2. Utilities / Pipelines
3. Food Companies
4. Food / Drug Retailers
5. Fast Food Giants
6. Household Goods

This is by no means a complete scientific study, as I only included a handful of companies per sector.  However, I did choose some of the most common names in this sector.  In addition, I tried to focus on companies that had strong brands in their space, as those should be the companies that hold up well in down markets. 

Finally, the numbers do not include dividends or any special payouts.

click to enlarge images

1) Big Cap Pharma Stocks

2) Utilities and Pipelines

Having relatively fixed rates for your product seems to equate to a more balanced earnings through the various cycles.  This is proven by the fact that even the worst performing stock in this group was down only about ½ as much as the overall S&P itself.  This should be a good sector to leave your money in for now, but on the negative, it won’t likely give you great exposure to a bull market when it commences.

3) Food Companies

Apparently, we all really do need to eat!  I was a bit scared to jump into this sector, as I wasn’t sure how these companies would be able to pass along higher Input costs, such as wheat, corn and energy, but it appears that those fears may have been misguided.  Factor in dividends and you would be ahead of the S&P by over 20%..

4) Food / Drug Retailers

Apparently, someone had to cut their margins on food prices, and it appears that it was the retailers.  By not having the ability to raise prices, margins were cut at many of these companies.  This trend is not likely to end soon, so while this group did outperform the S&P, it isn’t the best "Defensive" sector to be in.

5) Fast Food Giants

So much for the theory that people eat at home more during downtimes!  While higher-end restaurants suffer during downtimes, it appears that people view fast food more as a staple than as a luxury.  With the exception of Wendy’s (WEN) (where operational issues are more the cause of the downfall), all of our choices posted positive returns.

6) Household goods

One surprising finding here is that Procter and Gamble (PG), which is long considered by many to be the Ultimate Defensive Stock, has actually performed worse than the average for this group.   However, it sure beats having stayed in Financials for the past 9 months!

As a recap:

So, "Defensive" investing definitely would have been the best play for the past 9 months.  Although you would still be in the negative overall, you’d have protected much more of your capital.

Disclosure: none

Comments

[ElGordo:]

What is the rationale for removing the worst performer when calculating the results?

2008 Aug 10 08:30 AM

[Larry Belle...:]

Thanks for the question, 174242. I wanted to show the results without and without the worst performer, to eliminate a Single Companies operational issues from throwing off an entire sector's results. The other way that I could have done it was to use many more examples per sector (perhaps as many as 10), but that would have made the article too long. A good example is Wendy's which moved the entire sector down several spots on the chart.

The results at the bottom DO include the worst performer....

Cheers
Larry

2008 Aug 10 10:58 AM

[mkreisel:]

JNJ is at its all-time high and still dirt cheap!

2008 Aug 10 12:40 PM

[bizonly:]

in the seventies i attended a pillsbury meeting that explained that in a recession people traded down to fast food and of the top twenty things they cut- fast food was 17 -with traveling #1-

pillsbury owned burger king at the time-all my money has been safely
parked with bkc for over a year'turns out that meeting saved me
over 250k

2008 Aug 11 07:19 AM

[RWCMom:]

Bizonly, thanks for the outlook on fast-food. I don't like the industry for personal reasons but it intrigued me how it would stay steady. Your explanation clears that up.

2008 Aug 13 08:49 PM

[bluetea:]

As a retired Colgate employee who ignored financial advisor's advice and hung on to a lot of company stock , I feel vindicated.
They are well-positioned globally to grow in all the emerging economies and so far have been able to offset the high commodity prices.

2008 Aug 19 06:44 PM