With the Dow Jones Industrial Average reaching a new all-time
high for the first time since the Great Recession and financial
crisis, and the S&P 500 creeping closer and closer to its
record high, many investors have been getting worried that the
stock market is overheated. Headlines like "Skepticism High Amid
Market's Rally", and "When Will This Big Pullback Finally Happen"
have been prominent in most financial publications and websites for
weeks now, only adding to the sense that are due for a
I, for one, am not so sure. Valuation measures on the whole
continue to paint a picture of a market that is trading somewhere
in the range of fair value. The housing market continues to
rebound. And the Federal Reserve continues to push investors toward
risk assets. All of those factors are bullish for stocks.
Regardless of whether a correction is coming, however, I'm not
one to try to time the market -- and you shouldn't be either. Far
too many investors, succumbing to their own emotions and behavioral
biases, end up buying high and selling low when they try to jump in
and out of market. In his recently released annual letter to
Berkshire Hathaway shareholders, Warren Buffett noted that stocks
gained more than 17,000% in the 20th century -- despite wars,
depressions, and a host of other issues. "Since the basic game is
so favorable," he said, "Charlie [Munger, his Berkshire partner]
and I believe it's a terrible mistake to try to dance in and out of
[the market] based upon the turn of tarot cards, the predictions of
'experts,' or the ebb and flow of business activity. The risks of
being out of the game are huge compared to the risks of being in
If your emotions are getting the better of you amid all this
pullback talk, and you really feel like you need some downside
protection, you might want to consider some defensively oriented
stocks. Stocks in sectors like health care and utilities often are
steadier performers than the broader market, and don't get hit as
hard as other stocks when times get tough. By looking to stocks
like these, you stack the odds in your favor that you will limit
losses if the market does pull back (though, of course, it's not a
guarantee), but keep yourself exposed to stocks in the event that
you're wrong and stocks keep heading higher (and, if you're like
most investors, there's a good chance you will be wrong).
Recently, I used my Guru Strategies (each of which is based on
the approach of a different investing great) to find some of the
most fundamentally sound stocks in defensive areas of the market.
Here's a sampling of what I found.
Merck & Co. Inc. (
This healthcare giant ($130 billion market cap) offers an array of
prescription medicines, vaccines, biologic therapies, and consumer
care and animal health products, operating in more than 140
countries. It's a favorite of my James O'Shaughnessy-based value
model. When looking for value plays, O'Shaughnessy targeted large
firms with strong cash flows and high dividend yields. Merck is
plenty big enough, and it also has $4.55 in cash flow per share
(more than three times the market mean), and a 4.0% yield, all of
which help it pass the O'Shaughnessy-based model.
Newmont Mining Corp. (
When investors get fearful, they turn to gold, which is why gold
fared so well from 2007-2011 -- and why it's struggled in the past
year-plus, as investors have gotten more risk tolerant. It thus
makes sense, if you're worried about the market and economy, to
have a gold miner like this Colorado-based firm in your portfolio.
My Peter Lynch-based model likes its 16% long-term growth rate
(using the average of the three- and four-year earnings per share
growth rates) and 10.6 P/E ratio, as well as its 4.3% dividend
yield. Lynch famously used the P/E-to-Growth ratio to find
bargain-priced stocks, adjusting the growth part of the equation
for dividend yield with firms like Newmont. Newmont's
yield-adjusted PEG is 0.52, which comes in well below the model's
1.0 upper limit, a great sign.
Medtronic, Inc. (
Minnesota-based Medtronic ($47 billion market cap) is the world's
largest independent medical technology company, making a wide array
of products that alleviate pain, extend life, and restore health.
It gets high marks from my Lynch-based model, which likes its 13.6%
long-term growth rate, 14.0 P/E, and 2.3% dividend, which make for
a 0.88 yield-adjusted PEG.
Accenture PLC (
Ireland-based Accenture provides management consulting, technology,
and outsourcing services. Such a firm might not seem particularly
defensive, but Accenture's broad global reach diversifies its risk
quite a bit -- back in 2008 and 2009, when the U.S. and other
developed economies were tanking, Accenture increased earnings per
Accenture ($54 billion market cap) is a favorite of my Warren
Buffett-based model. It looks for firms with lengthy histories of
earnings growth, manageable debt, and high returns on equity (which
is a sign of the "durable competitive advantage" Buffett is known
to seek). Accenture delivers on all fronts. Its EPS have dipped in
only one year of the past decade; it has no long-term debt; and its
10-year average ROE is an impressive 48%.
Alliant Energy Corporation (
This Wisconsin-based, investor-owned public utility serves about
one million electric customers and about 414,000 natural gas
customers in the Midwest. It has a $5.3 billion market cap.
My Lynch-based model likes Alliant. The firm has a long-term
growth rate of just over 14%, a 16.3 P/E, and a 3.9% dividend
yield. That makes for a yield-adjusted PEG of 0.90, a sign its
shares are a bargain.