As the Dow Rises, Are Defensive Stocks Preparing for the Next Downturn?

Traditionally defensive stocks aren't posting the same gains as higher-growth Dow stocks or the broader Dow, suggesting that investors are getting more aggressive with their investing. Will that prove smart or ill-timed?

Mar 18, 2014 at 9:00PM
Longview

On Tuesday, the Dow Jones Industrials (DJINDICES:^DJI) gained another 89 points, adding to its rebound from yesterday and reasserting the positive trends that have support the average throughout the five-year bull market. But even as growth candidate Microsoft (NASDAQ:MSFT) soared almost 4% today, defensively positioned stocks Procter & Gamble (NYSE:PG) and McDonald's (NYSE:MCD) were among the few decliners Tuesday, and Wal-Mart (NYSE:WMT) only managed to post the smallest of gains on the day. As investors apparently get more comfortable with the prospects for stocks, will defensive stocks get left behind and finally fall back to more reasonable valuations?

The pros and cons of going out of favor
For years, investors have stuck by P&G, McDonald's, and Wal-Mart, even as they've all struggled with growth challenges that they've only partially overcome. For Wal-Mart, domestic competition has hurt its U.S. sales growth, as the retailer faces competition from below in the form of deep-discounting dollar stores and from above via traditional rivals like Target. Meanwhile, McDonald's and Procter & Gamble have suffered from a strong dollar, which has hurt international results at a time at which emerging-market economies have been struggling. Given economic conditions that already made growth challenging even in local-currency terms, neither P&G nor the Golden Arches can afford to have adverse currency impacts crush their results even further.

What has sustained these stocks for many investors, though, has been their lucrative dividends and their protection against market downturns. With yields between 2.5% and 3.5%, all three of these stocks have long histories of long-term stock performance, and the implicit protection against falling markets has helped keep shareholders satisfied even though their returns have lagged the Dow's overall performance substantially.

Because investors have looked for the protection of defensive stocks, earnings multiples have climbed to uncomfortable levels in many cases. P&G in particular, trades at 21 times trailing earnings and 17.5 times forward estimates, while McDonald's corresponding figures are 17.5 and 15.5 respectively. Wal-Mart looks like a relative value at 15 times trailing and 13 times forward earnings, but with none of the three stocks producing very much growth, it's hard to consider any of them true value stocks at this point.

Looking ahead
In assessing the Dow's future performance, be sure to keep an eye on these three defensive stocks. If the bull market is heading into its last stages, one would expect the highest-growth stocks to lead the way, leaving laggards better positioned to weather future stock market storms. Meanwhile, McDonald's, Wal-Mart, and Procter & Gamble all need to find ways to grow in order to sustain their own earnings, and that has been an increasingly difficult challenge for the three companies over the past several years.

Get the best stocks into your portfolio
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Procter & Gamble and owns shares of McDonald's and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers