Defensive Buy

Categories: Company Management

One of the underlying themes of The Walking Dead is an examination of what is essential for human survival vs. the extraneous and frivolous. Food, shelter, medicine, communications, transportation, heat, and water are the areas that make the cut, in addition to armaments. Ironically, entertainment is not on the list.

Economic cycles have boom and bust periods. During boom periods, people have money and can spend on non-essentials. However, during bust periods, money is much tighter, and discretionary income is forced to budget and choose the basics. Industrial sectors that are deemed essentials on a perennial basis are unlikely to suffer any kind of cyclic downturn, since they are staples that people need all the time.

Stocks in companies categorized in these essential sectors are considered to be defensive buys for portfolios, in the sense that their performance is independent of the prevailing economic climate. As they are tied to business cycles, defensive buys are also synonymously referred to as countercyclical stocks, vs. cyclical stocks, which normally only do well during bullish economic periods. The economic cycles, on average, have trended in each direction every two presidential elections, or roughly eight years, since the latter half of the 20th century.

Related or Semi-related Video

Finance: What is Defensive Stock?1 Views

00:00

Finance allah shmoop what is a defensive stock Well pretty

00:07

much everyone looks like a genius in a big bull

00:09

market right At least everyone who is invested in the

00:12

market and not just sitting there holding cash well in

00:15

a big bull market Every stock's going up everyone's making

00:19

money he invested or getting richer on the best investment

00:23

results of that bunch come from the aggressive investors or

00:27

offensive groups of stocks the ones that exist on a

00:31

hope and a prayer of massive growth They usually pay

00:34

no dividend that khun traded hundreds of times trailing earnings

00:38

or more and they're expected to more than double earnings

00:41

every year for the next five years or more Offensive

00:44

that's How owners of them get when those stocks get

00:47

crushed in a bad market Yeah well the fed raises

00:51

rates Bomb goes off in an oil field The president

00:55

loses a high stakes arm wrestling match Something like that

00:58

And all of a sudden the bull market is over

01:00

the masses air selling selling selling and well that hundred

01:03

times a dollar of earnings growth stock promising wifi enabled

01:08

fidget spinners trading at one hundred bucks a share atleast

01:11

it wass last month Yeah well it crater celestine Half

01:14

of that ouch Fifty bucks a share and still expensive

01:17

and trading down So what about that tortoise to this

01:20

company's hair The big dumb slow moving oil company How

01:25

about them It grows revenues It like something totally unexciting

01:30

like gdp plus a percent in a good year It

01:33

won't double earnings for like thirty years or more but

01:37

it has and will pay a six percent dividend more

01:40

or less forever And if you think about it while

01:42

skittish linoleum our favorite company like that trades at forty

01:46

bucks a share and pays two dollars forty cents a

01:48

year in davy in a big bad ugly awful market

01:52

Well sure it probably goes down a bit Two bucks

01:54

to thirty eight a share five bucks to thirty five

01:57

maybe even a bit more But while nervous marble has

02:00

gone from one hundred to thirty down some seventy percent

02:04

while skittish linoleum is gone from forty to thirty five

02:08

in these bad two years of bear market itis down

02:12

a few percent not too bad And meantime it's paying

02:15

its two dollars forty cents a year dividend steady so

02:18

you've gotten back four dollars and eighty cents in dividends

02:21

so even down from forty to thirty five If you

02:24

add back the dividend and you should know you're only

02:27

down like twenty cents and we're going to forget about

02:29

taxes here Big would compare that to nervous marble So

02:32

yeah that's a defensive stock when the trades at low

02:35

multiples of earnings and pays a big fat dividend and

02:38

generally does well when the tide goes out and shows

02:42

everyone else's you know not thing And so well there

02:45

Yeah but every now and then it's Awfully nice to 00:02:47.788 --> [endTime] be the tortoise and not the hair

Find other enlightening terms in Shmoop Finance Genius Bar(f)