Ever since the 2008 market collapse and financial crisis, many
investors have been suffering from a fear of heights. Whenever the
market goes on a nice upward run, they get fearful -- very fearful
-- with the still-fresh scars of the '08 crash leading them to
think that what goes up will certainly come down.
That's what seems to be happening right now. With the market
having a very strong first quarter, fears have arisen that things
have been too good, and that sentiment has become overly
I for one don't think it has. Valuations remain reasonable, and
the gains in the market have been accompanied by some very real,
significant improvements in the economy. New claims for
unemployment have continued to fall lower and lower over the past
three months, as have continuing claims. The manufacturing and
service sectors have both continued to expand during the quarter,
retail sales continue to grow, and the S&P 500 still trades for
about 14.6 times trailing 12-month operating earnings and 16.2
times trailing 12-month as-reported earnings.
Still, given the market's rise and the lingering scars of 2008,
it's tempting at times like these to take the profits and bail on
stocks. But keep in mind that trying to time the market is a
dangerous game, and numerous studies show that most investors fail
when they try to do it. If you really need to calm your nerves,
however, I think a better option than bailing on the market
altogether is to simply switch to some more defensive areas. That
way you give yourself some downside protection, but you also stay
exposed to stocks and can capture a good amount of the market's
gains if stocks continue to flourish.
With that in mind, I recently use my Guru Strategies -- each of
which is based on the approach of a different investing great -- to
look for some fundamentally strong stocks in more defensive sectors
of the market. I found a number of intriguing plays; below are some
the best of the bunch. These are the sort of stocks that should
allow you to stay in the market, without staying up all night
worrying about your portfolio.
Xcel Energy Inc. (
Utilities are traditionally a very defensive sector, and my James
O'Shaughnessy-inspired growth model is finding a lot to like about
this Minnesota-based electric and natural gas utility, which has
operations in 8 Western and Midwestern states. The O'Shaughnessy
growth approach looks for companies that have upped earnings per
share in each year of the past half-decade, which Xcel ($13 billion
market cap) has done, and which have a key combination of
variables: a high 12-month relative strength, which is a sign that
the market is embracing the stock, and a low price/sales ratio,
which is a sign it hasn't gotten too pricey. Xcel has a very
reasonable 1.2 P/S ratio, and a solid relative strength of 74, so
it makes the grade.
Molson Coors Brewing Company (
This Denver-based brewer makes some of the world's most popular
beers, including Coors Light, Heineken, Amstel, Molson, and
Carling. The $8.1-billion-market-cap firm is a favorite of my Peter
Lynch-inspired strategy, which considers it a "stalwart" -- the
type of big, steady company Lynch found offered protection in tough
times. (And, let's face it, when times get tough, people still find
a way to buy beer.)
Lynch famously used the P/E-to-Growth ratio to find growth
stocks selling on the cheap, and for stalwarts he added dividend
yield to the growth portion of the equation. When we divide
Molson's 12.4 P/E by the sum of its 12.3% long-term growth rate (I
use an average of the three-, four-, and five-year EPS growth rates
to determine a long-term rate) and dividend yield (2.8%), we get a
yield-adjusted P/E/G of 0.82. That comes in comfortably below this
model's 1.0 upper limit, sign that it's a bargain.
Advance Auto Parts, Inc. (
An auto parts business like Virginia-based Advance ($6.4 billion
market cap) can help you play defense because when times get tough,
people are more likely to fix up their existing cars than buy new
ones. And Advance did well during the Great Recession, upping EPS
in both 2008 and 2009 -- in fact, it has increased earnings in
every year of the past decade. It's a favorite of my Lynch-based
model, which likes the firm's 22.6% long-term growth rate and 0.76
P/E/G ratio. My O'Shaughnessy growth model also likes Advance's
history of persistent earnings growth, as well as its combination
of a 1.04 price/sales ratio and 90 relative strength.
The TJX Companies (
The parent of discount retailers T.J. Maxx and Marshalls,
Massachusetts-based TJX ($30 billion market cap) fared very well
during the Great Recession as consumers flocked toward bargains.
It's continued to do well during the recovery, and has upped EPS in
each year of the past decade, part of the reason my Warren
Buffett-based model is high on it. A couple more reasons: The firm
has enough annual earnings that it could, if need be, pay off all
its debts in less than a year, and it has averaged a 37.7% return
on equity over the past decade.
TJX also gets strong interest from my Lynch-based model, which
likes its 21.5% long-term growth rate and 0.94 P/E/G, and my
O'Shaughnessy-based growth approach, which likes the stock's
combination of a 1.28 price/sales ratio and 94 relative
Johnson & Johnson (
The diversified healthcare giant had a rough fourth quarter, barely
eking out a profit amid the fallout from several product recalls.
But it still upped revenues for the period -- and it has a lengthy
history of success and still boasts a number of strong brand names.
Healthcare firms often provide defensive protection to a portfolio,
and my O'Shaughnessy-based value model thinks JNJ is a good bet. It
looks for large firms with strong cash flows and solid dividend
yields, and JNJ fits the bill. It has a $180 billion market cap and
more than $65 billion in trailing 12-month sales; $4.66 in cash
flow per share, more than three times the market average; and a
solid 3.5% dividend yield.
I'm long TJX and AAP.