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Smart Stocks That Are Doing Their Job

Dan Caplinger
August 9, 2011

Some stocks do better during downturns than others. Investors depend on these stocks to protect them from the full damage of market crashes. So in light of yesterday's 635-point decline for the Dow, it's a reasonable time to ask a simple question: Are the stocks that investors believe can defend your portfolio from bad markets getting the job done?

What's behind defensive stocks
The rationale as to why some stocks don't fall as much during market downturns is pretty simple. During wild bull markets, exciting stocks with fast growth rates and lots of future potential draw most of the attention from investors. That's because when stocks are going up, these stocks tend to go up faster, bringing better overall returns to those willing to take some extra risk.

On the other hand, dull, boring stocks with minimal growth prospects and stable businesses don't have much flash during bull markets. But when the economy slows, they have what it takes to get through the tough times with less of an impact on their business -- and therefore their stock price -- than those flashier high-growth investments.

Some of the industries that investors tend to see as defensive include health-care stocks and consumer staples. The reason is simple: When the economy is bad, people may be able to put off big-ticket consumer items, and industrial activity may slow down enough to hurt cyclical industries. But everyone still needs the medical care and basic products they use every day, and so the companies that sell them have a built-in buffer against a slowing economy.

So, are they working?
So far, it looks like at least some defensive stocks are succeeding in limiting investor losses. That's especially apparent in consumer staples. Johnson & Johnson (NYSE: JNJ  ) and Procter & Gamble (NYSE: PG  ) had the smallest losses in the Dow Industrials yesterday, falling just over 2% versus the Dow's 5.5% drop. Similarly, Coca-Cola (NYSE: KO  ) and Kraft Foods (NYSE: KFT  ) , which sell the food and beverages that people need, lost between 3% and 4%.

Health-care stocks, on the other hand, didn't do quite as well as some would have hoped. Both Pfizer (NYSE: PFE