Tags: Defensive | Stocks | pain | safety

Seeking Safety and Avoiding Pain in Defensive Stocks

Wednesday, 27 Jun 2012 10:07 AM

 

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With losses in the U.S. stock market felt across all sectors, investors are scrambling to find an oasis of safety.

The questions surrounding Europe's debt crisis show no signs of abating after Spain formally requested rescue funds, a move some analysts say could be a prelude to a full bailout of the country. What is also unclear: how much progress will be made at a European Union summit later this week, the 20th such attempt leaders are making to tackle the issue.

The domestic picture may be stronger, but economic data has frequently disappointed, and last week, the Federal Reserve cut its growth projections for the U.S. economy.

Given the environment, many investors are looking to avoid risk. But even many traditionally "safe" plays look riskier now. Here are some ways to get defensive within the defensives' zone.

CHECK OUT REVENUE GROWTH AND SOURCE

Amid weakening profits, investors are looking to revenue growth as a sign of stability. Multinational consumer staples have long been viewed as one of the most reliable ways to avoid downside, but the group's international reach may now be a weakness.

"Procter & Gamble and Colgate Palmolive have become less defensive than they used to be," said Michael Mullaney, chief investment officer of Fiduciary Trust Co. in Boston. "They still have a low beta, but you're not getting the same bang for your buck that you used to because they have so much overseas exposure."

Last week, P&G, which makes everything from toilet paper to laundry detergent and batteries, cut its fourth-quarter earnings and revenue forecasts, saying sales would be hurt by weak growth in developed markets and unfavorable foreign-exchange rates. In Procter & Gamble's 2011 earnings statement, it reported that 20 percent of its annual net sales came from Western Europe, with another 14 percent coming from a region that includes Central and Eastern Europe, as well as the Middle East and Africa.

P&G isn't alone.

PepsiCo Inc and tobacco company Philip Morris have also recently warned about Europe's impact.

"One of the things we've done is to move away from multinationals and into companies without any or minimal exposure to Europe," said Oliver Pursche, co-manager of the GMG Defensive Beta Fund in Suffern, New York, adding that the fund had reduced its holdings of Pepsi, Coca-Cola Co. and some pharmaceutical names because of their European revenue exposure.

"We like Verizon and AT&T, utilities and Yum! Brands, which has international exposure, but to Asia and Latin America rather than Europe," Pursche said. "We also like Apple Inc, and their revenue growth is a big part of that."

The GMG Defensive Beta Fund is up 3.8 percent so far this year.

While the economies in the United States and China have slowed, they are still expanding, a fact that could buffer against further turbulence in the eurozone.

"We're increasing exposure to the small- and mid-cap areas because those tend to be more domestic," said Mullaney, who helps oversee $10 billion. "I'm agnostic to the sector so long as they have U.S.-centric sales exposure."

LOOK FOR DIVIDENDS

With low rates that don't look to be going away any time soon and high market volatility, steady returns are key for investors.

Jill Cuniff, who oversees $19.4 billion as president of Edge Asset Management in Seattle, said that "in this environment, dividend income is increasingly valuable. The only sector we're seeing with real inflows is dividend-paying stocks."

Cuniff manages the Principal Equity Income Fund, which has JPMorgan Chase & Co. as its largest holding. The fund is up 2.2 percent so far this year. While the bank has seen its share of turbulence lately — the stock is down 22 percent so far this quarter, hurt by Europe's turmoil and news of a multi-billion-dollar trading loss — Cuniff said the company was attractive in the long term.

She said that she liked JPMorgan not only for the size of its annual dividend — about 3.4 percent of the stock's current price at just under $36 — but also the company's "capacity and commitment to growing dividends down the line."

The fund has a number of holdings in traditionally secular sectors, including technology names.

"There's a lot of maturing in that sector in terms of dividends," she said, noting that Apple recently joined Cisco Systems Inc. in paying a dividend, while Microsoft Corp. raised its yield.

"These aren't traditionally defensive names, but they're attractive to us," she said.

© 2014 Thomson/Reuters. All rights reserved.

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