What are defensive stocks?

What are defensive stocks?

Beginner

1st September, 10:14
Updated: 29th October, 16:59

Looking to invest in stocks that tend to hold up well during times of economic turmoil?

Defensive stocks are worth considering for any portfolio. This lesson will walk you through what defensive stocks are, their typical characteristics, and where they can be bought. On top of that, we’ve also prepared a list of defensive stocks that could make for attractive buys.

What are defensive stocks?

Also known as non-cyclical stocks, defensive stocks are stocks of companies that sell products which people use in both good and bad economic climates. Examples of defensive stock investments include utilities companies and businesses that make non-durable goods such as soap and toothpaste.

Why do investors look for defensive stocks?

Mainly investors are looking for stability and reliability from defensive stocks. Companies that make luxury goods and offer tourism and hospitality services can be susceptible to big losses when the economy sours, whereas defensive stocks benefit from the need that consumers have for certain products or services at all times. As befitting their name, defensive stocks offer a defense against tough times for both the economy and the stock market.

What are the defining characteristics of defensive stocks?

1) They hold up well during economic downturns

Regardless of how the economy is acting, you’re always going to need electricity in your home, and soap and shampoo to keep clean during your daily shower. Companies that offer these products or services may not be sexy, but they’re safe havens during times of economic worry.

2) They lag behind when times are good

Defensive stocks are capable of going up during boom times for the economy and the stock market, but they’ll likely lag well behind top growth stocks. This means you could be missing out on other opportunities if you buy defensive stocks during bull markets.

3) They don’t offer major growth

Robust earnings growth is the engine that drives the most successful stocks over the long haul. Defensive stocks usually feature far more tepid earnings growth, favouring stability in the long term instead. So while they can offer relative safety in specifically negative climates, they’ll likely fail to match growth stocks’ performance over the long haul. 

Here are some examples

If you’re considering adding some defensive stocks to your portfolio, here are a few stocks that are worth looking into.

1) Wheaton Precious Metals (WPM)

During times of economic distress, investors often turn to precious metals as a safe haven investment. Wheaton Precious Metals produces and sells silver bars made out of silver mined by other companies. The stock soared to an all-time high in mid-May 2020.

2) HCA Healthcare (HCA)

People get sick in good times and bad, which makes a for-profit healthcare services provider like HCA Healthcare a potentially attractive stock pick during uncertain economic times. HCA’s stock nearly doubled from mid-March to early June 2020.

3) Tesco (TSCO)

Everyone needs to eat, no matter what the economy’s doing. That makes companies such as UK-based grocery chain Tesco a viable pick as a defensive stock. The lockdown caused by the COVID-19 pandemic has prevented people from dining out, further increasing grocery demand. Tesco’s stock hasn’t done anything particularly exciting lately, but it’s also shown a lot less volatility and downside than many growth stocks in 2020.

4) Campbell Soup (CPB)

Sticking with the theme of people always needing to eat, Campbell Soup’s stock has also held fairly firm in 2020, despite volatile conditions for both the global economy and global stock markets. The maker of processed foods and snacks is trading near its highest point in two and a half years.

How do I find defensive stocks?

You’ll find several different investment websites that offer screening tools which let you search for defensive stocks based on various fundamental and technical parameters. But you can also find the best defensive stocks right here, with our lists of top-performing defensive stocks published every month on this website.

Visit this guide for more information on how to find defensive stocks > 

Now that you have a better understanding of defensive stocks and why you might consider investing in them, click to keep learning and check out our next lesson on blue-chip stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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