Sunday, March 23, 2008

Defensive stocks

In different markets, different sexy terms come into play. I guess the latest infatuation on Wall Street in recent months has been "defensive stocks". Defensive stocks usually refer to stocks that will see stable profits even during times of trouble, ie like the past few months lah. These would be stocks in industry sectors like: consumer staples ie your food, beverage, razor blades etc. The thinking is that people need to eat, drink and shave no matter what right? Stock market down means everybody goes without food? Unlikely, so these are defensive stocks.

The other sectors are like pharma (your diabetic patient needs his pills regardless of stock market woes), utilities (eh, obvious I hope, we need electricity even during bear markets) etc. So you get the idea, things that we can't do without even during an economic downturn.

So what are things that we do without during the downturn? Well it actually differs for different entities on this planets. For example, Ah Beng who made money punting property and bought himself two Ferraris will still drive his Ferraris and buy Prada bags for his Ah Lians even though his latest punt has gone wrong and he has a $4mn mortgage but his condo at Sentosa is worth probably <$1mn and his monthly salary is $5k. So to him, Ferraris and Prada bags are still things that HE cannot do without even during a slowdown. But for most people and for the stock market, consumer non-staples (like car, furniture, luxury products, massage chairs, high tech goods etc) usually see profit decline.

Also most of the darling sectors that rallied during 2003-07 bull market ie oil exploration, shipping, property etc. One reason would be bcos credit is drying up and most of these sectors require a lot of credit financing to grow their profits. Of course, some experts may beg to differ, these sectors are in a secular boom and some silly sub-prime trouble is not going to derail their "sexy" story. Well... this blog is big enough for differing biews, so share your thoughts if you have some. The other type of defensive names would be stocks that pay high dividend, has huge amts of cash on their balance sheet, or stocks that generate huge cashflow regardless of business cycles