What are Defensive Stocks? Pros, Cons, & Sectors to Watch

These companies produce goods or offer services that consumers will buy regardless of the state of the market or economy. Fundamentals like food, healthcare, and utilities are just a few of the many types of industries a defensive sector fund might invest in. Since the demand for consumer staples doesn’t slow even in a weak economy, the sector is noncyclical. An added perk is its higher dividend yield than the S&P 500 Index — even during a recession. The consumer defensive sector represents companies engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco. Prominent names include Walmart WMT, PepsiCo PEP, and Costco Wholesale COST.

  1. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy.
  2. As such, the companies that make these items are said to maintain reliable, steady growth regardless of the economy.
  3. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments.
  4. With this and the premiumization trends, we think the firm’s stock will gravitate to our valuation over time.

The utilities sector includes electric, gas, and water utilities, as well as companies that operate as distributors or producers of those utilities. Renewable energy sources like solar bonds interest rates and the impact of inflation 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.

Managing risk with defensive stocks + a diversified portfolio

What you need is a clear analysis guideline that will tell you what is important to know and how to make the best investment decisions. The consumer defensive sector is particularly interesting during these times of uncertainties. Let’s discuss its greatest strengths and weaknesses and how to get the best from it. Prefer to invest in the consumer staples sector via a ready-made portfolio? Syfe’s Core portfolios hold the XLP ETF as part of their diversified holdings. With Core portfolios, you can start investing from any amount and dollar cost average effectively every month.

Tyson’s strategy to sell three types of meat is intended to offer diversification, but diversification has its costs, and the headwinds of any one meat have weighed on companywide results at times. Additionally, we think there are limited revenue or cost synergies across different proteins. Stocks in the consumer defensive sector have had a rough go of it in recent months, part of a longer spell of poor performance during which these generally stable businesses have been hit by an unusual number of crosscurrents.

Definition and Examples of Defensive Sector Funds

Additionally, the consumer staples sector has historically experienced lower price volatility compared to other sectors, which are more correlated to business cycles. The sector’s relatively steady sales and profits also provide a source of stability during volatile markets. This sector includes companies that offer communication services through cellular, fiber-optic, fixed-line, wireless, and high-bandwidth networks. Their businesses follow known patterns through each phase of the economic cycle and thus tend to preserve value as the economy moves into a recession. Fidelity Select Communication Services Portfolio (FBMPX) is one such mutual fund that grants investors exposure to this sector. This broad defensive sector includes hospitals and other healthcare facilities, insurance companies, drug and medical instrument manufacturers, and biomedical companies.

While no stock is completely immune to market volatility, consumer staples stocks tend to decline much less during corrections. At this time of writing, the broad-based S&P 500 index has slipped nearly 7% in the year to date, but the S&P 500 consumer staples sector is only down 4% for the same period. CPG manufacturers are also keen to appeal to a value-conscious consumer. While promotions weren’t used when supply and demand were off-kilter, promotional intensity has more recently stepped up. Total CPG promotional levels jumped 10% on average over the last 10 weeks versus the same period a year ago.

Warren Buffett also became one of the greatest investors of all-time in part by focusing on defensive stocks. A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle. Defensive stocks should not be confused with defense stocks, which are the stocks of companies that manufacture things like weapons, ammunition, and fighter jets. Defensive stock funds can reduce risk and losses in the value of your portfolio during economic declines, but these funds can still lose value during a market correction or bear market. For this reason, defensive sector funds are most effective when you use them as one part of a diversified portfolio of mutual funds.

However, we don’t think recent performance is just a byproduct of increased consumer stock-ups of essential fare since March 2020. “We view shares as attractive, trading at a 40% discount to our intrinsic valuation while offering a 4%-plus dividend yield. Concerns abound surrounding the impact a weakening consumer spending environment amid an intensifying competitive landscape could have on Kraft Heinz and https://www.day-trading.info/jobs-with-numbers-12-entry-level-jobs-with-big/ its peers. However, we don’t think such a backdrop will prompt the firm to chase near-term market share gains and see this angst as overblown. Not all of these basic goods are defensive by default, but some can maintain stable prices during an economic decline. For instance, gold has historically produced a high return amid economic volatility because many investors see it as a safer alternative to stocks.

What Are Defensive Sector Funds?

Utility companies also get another benefit from a slower economic environment because interest rates tend to be lower. “CEO Mark Clouse’s tenure has been fraught with change since he joined in January 2019. The company parted ways with its fresh business and the bulk of its international operations while working to steady its core meals, beverages, and snacking arms.

Costco (COST)

Even groceries must invest massively in their online platform to enable consumers to order their food and pick it up at the store. Well-known companies include Altria Group (Marlboro cigarettes) and Diageo (Johnnie Walker and other liquor brands). 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.

Within consumer defensive stocks, we highlight Tyson Foods, Estee Lauder, and Kellogg. Defensive stocks are also known as noncyclical stocks because they are not highly correlated with the business cycle. Companies engaged in the manufacturing of food, beverages, household https://www.topforexnews.org/investing/10-different-ways-to-start-investing-with-just-1/ and personal products, packaging, or tobacco. Also includes companies that provide services such as education & training services. “We forecast sales to grow about 1% in 2024, as the tail end of inflation-related price increases offset the resulting volume declines.

Please don’t interpret the order in which products appear on our Site as any endorsement or recommendation from us. Finder.com compares a wide range of products, providers and services but we don’t provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service. Even though the consumer staples sector will likely always be around, they face unique challenges today.

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. These companies generate steady cash flow and predictable earnings during strong and weak economies. Their stocks tend to outperform nondefensive or consumer cyclical stocks that sell discretionary products during weak economies while underperforming them in strong economies. People depend on gas, electricity, water, and other utilities in daily life.

The profit margins on consumer staples products are known to be thin and the industry is highly competitive. “Tyson primarily sells raw beef, pork, and chicken, although it has increased its exposure to prepared foods. Despite the scale it has amassed (with a sales base that exceeds $53 billion), meat is a commodity and carries little to no brand or pricing power, exposing sellers to volatility in both costs and revenue.

This is compounded by many consumer staples companies facing higher freight and logistics costs as well. Their non-cyclical nature means that no matter where we are in the economic cycle, the average consumer will still buy necessary consumer staples products in more or less the same quantities – regardless of their price. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. On the flip side, the generally slow growth of defensive stocks often leads to smaller gains during a bull market. When other stocks are soaring, defensive stocks are more likely to perform below the market. Many of those companies face similar challenges that consumer cyclicals face when it comes down to dealing with digital sales.

August 24, 2022