Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



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

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.

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 19, 2014, at 4:19 AM, Interventizio wrote:

    I'd like to rotate from MCD to another stalwart, but there are none. There would be IBM, but I already have 15-17% of the portfolio invested in it presently.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2880881, ~/Articles/ArticleHandler.aspx, 9/4/2015 5:24:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated Moments ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:30 PM
^DJI $16102.38 Down -272.38 -1.66%
MCD $94.85 Down -1.16 -1.21%
McDonald's CAPS Rating: ***
MSFT $42.61 Down -0.89 -2.05%
Microsoft CAPS Rating: ***
PG $68.76 Down -1.17 -1.67%
Procter & Gamble CAPS Rating: ****
WMT $63.89 Down -0.97 -1.50%
Wal-Mart Stores CAPS Rating: ***