A Good Defense Can Be the Best Offense: Two Stocks for Your Portfolio

Kimberly-Clark and Colgate-Palmolive are two companies that your portfolio could use if you are worried about a market downturn.

Apr 18, 2014 at 2:13PM

As investors our goal is to make money, of course. I believe that the most important way to make money is not to lose it. For example, if you lost 50% in one year it would take a 100% gain the next year to get you back to break-even (and you would have just wasted two years of potential compounding returns).

Many people will tell you they have a method of timing the market, but please do not ever believe them. Instead of timing the market we should make sure to put a layer of security stocks in our portfolios, stocks like Kimberly Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL). As you can see below, holding on to these two companies during the last recession would have really helped your portfolio.

KMB Total Return Price Chart

KMB Total Return Price data by YCharts

Household names
Kimberly Clark sells its products through many different brand names that include Kotex, Kleenex, Huggies, Scott, and plenty more. You also probably have several Colgate-Palmolive brands in your house at this moment. The company sells its products under brand names like Colgate and Palmolive of course, as well as AJAX, Irish Springs, Softsoap, Hill's pet food, and more.

I consider these stocks defensive because no matter what the broad economy is doing you will always brush your teeth, wash your hands, use the restroom, et cetera.

To illustrate this, Kimberly Clark posted revenues of $18.2 billion, $19.4 billion, and $19.1 billion in 2007, 2008, and 2009, respectively. Over the same time period Colgate-Palmolive posted revenues of $13.7 billion, $15.3 billion, and $15.3 billion. Overall the recession did not significantly impact the top lines of either Kimberly Clark or Colgate-Palmolive, especially in comparison with the results from some other S&P 500 companies.

The numbers
The fact that these companies can grow their top lines when other companies can't is great, but we should still consider factors besides sales if we are considering investing in a company for many years to come.

Both of these companies appear to have very solid operations. Both Kimberly Clark and Colgate-Palmolive had net profit margins of over 10% in the last year and they have had very stable margins for the previous ten years. Stable margins show us that a company is likely well-run and that it employs a strong business model. High margins give companies a little bit of wiggle room for the occasional mishap. This means that high margins can protect a company's earnings from an internal operations blunder or lawsuit, which are bound to happen from time to time.

Neither of these companies has the burden of a large interest expense from its debt, either. Kimberly Clark had an EBITDA of over 14 times its interest expense last year and Colgate-Palmolive had over 32 times its interest expense in EBITDA. EBITDA, or earnings before interest, taxes, depreciation, and amortization, is not a GAAP-reported measure. However, this measure gives us a clearer view of a company's internal operations by stripping out some accounting procedures that do not affect the actual operations of the business, which is why it is helpful to look at this measure.

The big picture
Neither of these companies promises investors huge growth or astronomical returns. Investing in these two, however, will let you own pieces of two steady businesses that have proven themselves over time and will help you relieve some of the downside risk in your portfolio.

Kimberly Clark and Colgate-Palmolive are also both members of the S&P 500 Dividend Aristocrat Index, which means that they have raised their dividends each year for at least the last 25 years. Kimberly Clark and Colgate-Palmolive currently pay their investors annual dividend yields of 3.1% and 2.2%, respectively. 

As said earlier, it is nearly impossible to time the market, yet millions and millions of people attempt to do this. With the market hitting new highs on a pretty regular basis recently, there has been plenty of doom and gloom talk on the television, Internet, and newspapers. Instead of getting caught up in this and worrying, it is better to make sure that our portfolios are stocked full of excellent companies that won't be particularly bothered by what the rest of the market is doing.

3 stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Jacob Meredith has no position in any stocks mentioned. The Motley Fool recommends Kimberly Clark. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers