Understanding Defensive Stocks, Pros & Cons, Examples

However, you do have to watch out for these types of companies sometimes. Different issues, including weather and global supply chain problems, can impact how things go in this category. Defensive industries are a very attractive option for investors, especially during an economic downturn.

  • Companies without strong brand loyalty are susceptible to consumers switching brands, a trend that intensified during the pandemic.
  • Companies engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco.
  • Vanguard Utilities ETF (VPU) is an example of this kind of defensive sector fund.
  • This broad defensive sector includes hospitals and other healthcare facilities, insurance companies, drug and medical instrument manufacturers, and biomedical companies.

Chegg has reported Q2 earnings per share at $0.28, which has increased by 3.7% compared to Q1, which was 0.27. The Motley Fool recommends Costco Wholesale, Merck, Thermo Fisher Scientific, UnitedHealth Group, and Walmart. Analysts at Deutsche Bank believe a “U.S. recession remains more likely than not” because the Fed has reason to overtighten credit conditions, given the trajectory inflation has followed in the wake of the pandemic. In this category, you won’t find restaurants — or even major food manufacturing companies. It’s companies like Sysco and United Natural Foods that make up this category.

Understanding Defensive Stocks

Defensive industries comprise businesses that are relatively stable or relatively immune to economic fluctuations, i.e., economic expansions and recessions. Defensive businesses remain relatively unaffected in the event of an economic boom or recession in the sense that their earnings are uninfluenced by the economic fluctuations. The industry usually consists of businesses dealing in necessity goods, i.e., essentials, in the market. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful.

Many of these countries have a fast-growing middle class, leading to higher per-capita growth than developed markets. Plus, many emerging-market nations have been battling inflation for decades, which means consumers are used to seeing prices rise and less likely to change their purchasing decisions in reaction to price hikes. In addition to brands recognizable to US consumers—like Oreos and Triscuits—the company makes a number of snack food smart money concept brands popular in emerging markets. More than one-third of its revenues come from emerging markets, including Latin America and Asia. Those best positioned for this backdrop may include companies that can raise prices further without losing sales volumes. The soda industry, for example, is very consolidated, with high barriers to entry and only 3 main players of scale, including recent portfolio holdings Coca-Cola () and Keurig Dr Pepper ().

These defensive index funds can help investors hedge against a possible recession.

With earnings growth for the broad market declining, growth expectations for utilities may look increasingly attractive. “Earnings growth expectations for the sector are currently around 7% to 8%, which is kind of what investors are hoping for with the market,” says Simmons. By clicking on a company, you can see its most recent recommendation, as well as look at the fundamental data.

When you invest in defensive sector funds, your main goal is to defend against significant decreases in share prices that might occur during these events. Wilson and is among the most bearish of stock market prognosticators at the moment, having previously warned investors of one of the worst earnings recessions since 2008 to hit the market. He urged investors to que es dash buy up large-cap defensive growth stocks, like energy and industrials as opposed to consumer cyclical, housing related, small-cap, or interest-rate sensitive stocks. As mentioned earlier, because defensive industries comprise businesses that usually deal with necessity goods or essentials, they are relatively resilient to economic boom periods or recessions.

Adapting to the times

Here are the details, along with two index funds that could help investors hedge against a possible recession. Inflation reached a four-decade high in 2022 and the Federal Reserve responded by raising its benchmark interest rate at its fastest pace since the 1980s. Initially, many experts cried recession as prices soared and credit conditions tightened across the economy.

The Consumer Defensive sector comprises companies whose businesses are less sensitive to the economic cycle. These are products that people are unable or unwilling to cut out of their budgets regardless of the economic condition. These companies are engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco. This sector also includes companies that provide services such as education & training services, as well as food & drug retailing companies such as hypermarkets and consumer super centers. Companies that produce or distribute consumer staples, which are goods people tend to buy out of necessity regardless of economic conditions, are generally thought to be defensive. They include food, beverages, hygiene products, tobacco, and certain household items.

Investing in defensive businesses often provides long-run returns similar to other firms, but with less volatility. More importantly for long-term stock investors, defensive companies are less likely to go bankrupt because of their relative strength during recessions. Warren Buffett often invests in defensive companies, such as Coca-Cola (KO). Consumer staples companies with exposure to emerging markets could also be well positioned to weather any further economic storms in 2023.

The Vanguard Consumer Staples ETF

The difficulty, though, is maintaining gains made through investing in individual stocks. Start by investing in funds — including funds that focus on sectors you are interested in — and once you feel more comfident in using research tools to make the best choices, you can expert advisor coder start looking into individual stocks. What’s interesting is that, even though the average safety score for the consumer defensive sector is 64, different categories have their own scores. Pharmaceutical retailers is an especially strong category, with a 97 average.

One sector to consider as you move forward is what we call “consumer defensive.” These can be great stocks because they tend to be in areas that people need. Whether you want to invest in consumer staples stocks or ETFs, Syfe enables you to do so easily and affordably. Many dividend aristocrats – companies that have increased their dividends each year for at least 25 consecutive years – are part of the consumer staples sector. Consumers also benefit from long-term familiarity with defensive companies. Many defensive firms have been producing the same products for generations. Now think of all the consumers in the country facing those same decisions, and you get a sense of the dynamics that have been driving the consumer staples sector in 2022—and that are likely to persist through 2023.

Consumer staples sector

Renewable energy sources like solar panels and wind turbines are also included. Even in a recession, consumer spending on utilities is less likely to drop, so the value of stocks in this sector remain relatively stable. As the current recovery ages and trade tensions garner headlines, a money manager’s thoughts turn to defensive sectors. You can invest in the consumer staples sector through individual stocks or ETFs. Investors looking for broad exposure to the sector usually choose ETFs for diversification and convenience. Finally, although consumer staples stocks hold up well in recessionary periods, they tend to lag the broader market during boom times.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. The healthcare sector includes businesses that provide medical services and insurance, manufacture medical equipment or drugs, and/or facilitate patient healthcare in hospitals, clinics, labs, and nursing homes.

According to data from FactSet, the consumer staples sector had the highest percentages of companies that cited “inflation” on their Q4 earnings calls during this period. This suggests that inflation is a key concern for many consumer staples companies this year. Defensive stocks are also known as noncyclical stocks because they are not highly correlated with the business cycle. A sector is a segmented portion of the stock market that organizes companies by their operating business activities.

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