There's a tried-and-true maxim on
: Stocks fall a lot faster than they rise. There are myriad
examples, and the sharp plunge of 1987 is just one.
was growing at a nice clip, corporate profits were on the rise, and
investors were pouring into the
. And then, "
" came on October 19, 1987, pushing the S&P 500 down more than
20% in a single day. The fact that stocks had risen 250% in the
previous five years led to a great deal of complacency, as few
potential land mines stood on the horizon.
Looking back, we still don't even know what caused the crash. Some
think it was due to computer-driven trading programs that fed off
each other in a cycle of negativity, or that maybe underlying
had lost enough value to cause a cascading effect of unwinding
contracts. Others simply suggest that the market was due for a
breather and a mild sell-off turned into a panic-driven rush for
the exits as they day wore on.
We'll never know.
Fast-forward to 2012, and the skies are again seemingly clear. In
fact, we've just emerged from a risky phase for the global economy,
and the economic backdrop holds few land mines in the near-term.
But still waters run deep, and you have to always think about the
risks of a seemingly benign market mood. So it's simply prudent to
make sure that, at this phase in the market cycle, your portfolio
also contains a handful of deeply defensive stocks that will more
likely hold their own if the major indices slump badly.
Here are five stocks that have "bomb shelter"-like qualities...
1. Abbott Labs (
While many health care-related companies tend to focus on one core
strengths such as insurance, hospital ownership, niche drug
development or specialized medical devices, Abbott plays the field
by selling hundreds of products to a range of customers. This will
never be a fast-grower. Then again, sales have never fallen in any
of the past 20 years. The current $40 billion revenue base benefits
from a huge degree of recurring revenue and, thanks to modest
annual price increases, management is always able to maintain 20%
margins regardless of any cost pressures the company may face.
2. Archer Daniels Midland (
The agricultural titan has its share of challenges. Profit margins
can fluctuate as input prices and end-market prices gyrate back and
forth. But because ADM controls so much of the agro-industrial
complex, it is better insulated from the booms and busts that would
rock its smaller rivals in the farm belt.
The timing for this stock is good. Analysts think
trends will soon swing back in ADM's favor, which is why they think
earnings per share (EPS)
will rise from around $2.50 in fiscal (June) 2012 to around $3 in
fiscal 2013 and $3.50 in fiscal 2014.
3. Verizon (
No company has handled the migration from wire-line to wireless
phones as adroitly as Verizon. Management has been steadily
reducing expenses at the legacy wire-line business, freeing up
resources to further cement its gains in the industry-leading
wireless business. Even in adverse economic times, consumers would
be loathe to cut back on their need to stay connected. Indeed
today's smartphones are a lot like an addictive drug. Try going a
week without one. The fact that Verizon currently sports a 5%
have ample downside protection. Any sell-off in the stock would
simply boost the
, making it newly attractive to a fresh base of investors (whose
buying would presumably push shares back up.)
4. Loews (
There are plenty of insurance stocks that would represent safety in
a plunging market. But Loews is so broadly diversified that it is
insulated from the vagaries of any one particular insurance niche.
Not only is Loews involved in all kinds of insurance, it also owns
a hefty slate of energy assets, such as offshore drilling rigs and
natural gas rigs and pipelines. The fact that the stock's current
of $15.7 billion is actually lower than the
of $18.8 billion just underscores the relative safety of this
5. Southern Co. (
I could mention almost any power utility, but Southern Co. is an
exemplary industry play. The company's 4.6%
return on assets (ROA)
return on equity (ROE)
are among the best in the business. The fact that the company's
grows about 4% every year would surely be noticed by investors as
they made a flight to safety. If you buy shares today, you'll be
getting a yield of about 4%, but thanks to the power of
, you could be scoring double-digit annual yields (based on your
) if you hold this stock into the next decade.
Risks to Consider:
These stocks are unlikely to fall nearly as much as the broader
market in a major sell-off, but would likely take a moderate hit as
investors pull funds.
Action to take -->
Building a portfolio around these kinds of stocks is suitable for
the most conservative investors, especially those nearing
retirement. For more aggressive investors, you need simply to think
about having a degree of exposure to these safer stocks, even as
you remain more squarely focused on high-beta stocks that are
leveraged to a growing economy.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.