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.
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Finance: What is Defensive Stock?1 Views
Finance allah shmoop what is a defensive stock Well pretty
much everyone looks like a genius in a big bull
market right At least everyone who is invested in the
market and not just sitting there holding cash well in
a big bull market Every stock's going up everyone's making
money he invested or getting richer on the best investment
results of that bunch come from the aggressive investors or
offensive groups of stocks the ones that exist on a
hope and a prayer of massive growth They usually pay
no dividend that khun traded hundreds of times trailing earnings
or more and they're expected to more than double earnings
every year for the next five years or more Offensive
that's How owners of them get when those stocks get
crushed in a bad market Yeah well the fed raises
rates Bomb goes off in an oil field The president
loses a high stakes arm wrestling match Something like that
And all of a sudden the bull market is over
the masses air selling selling selling and well that hundred
times a dollar of earnings growth stock promising wifi enabled
fidget spinners trading at one hundred bucks a share atleast
it wass last month Yeah well it crater celestine Half
of that ouch Fifty bucks a share and still expensive
and trading down So what about that tortoise to this
company's hair The big dumb slow moving oil company How
about them It grows revenues It like something totally unexciting
like gdp plus a percent in a good year It
won't double earnings for like thirty years or more but
it has and will pay a six percent dividend more
or less forever And if you think about it while
skittish linoleum our favorite company like that trades at forty
bucks a share and pays two dollars forty cents a
year in davy in a big bad ugly awful market
Well sure it probably goes down a bit Two bucks
to thirty eight a share five bucks to thirty five
maybe even a bit more But while nervous marble has
gone from one hundred to thirty down some seventy percent
while skittish linoleum is gone from forty to thirty five
in these bad two years of bear market itis down
a few percent not too bad And meantime it's paying
its two dollars forty cents a year dividend steady so
you've gotten back four dollars and eighty cents in dividends
so even down from forty to thirty five If you
add back the dividend and you should know you're only
down like twenty cents and we're going to forget about
taxes here Big would compare that to nervous marble So
yeah that's a defensive stock when the trades at low
multiples of earnings and pays a big fat dividend and
generally does well when the tide goes out and shows
everyone else's you know not thing And so well there
Yeah but every now and then it's Awfully nice to 00:02:47.788 --> [endTime] be the tortoise and not the hair