Defensive Stocks - Hedge Against Bear Markets
What are Defensive Stocks
Defensive stocks are securities which do not react strongly to movements in the broad market. These stocks are generally companies which provide services that consumers need on a daily basis and are not generally purchased with disposable income. Defensive stocks will not provide stellar annual returns because they are not large earnings growth stocks. However, these stocks will normally have low p/e ratios with high dividend yields.
Restaurants are always a solid defensive stock play. Now this does not mean high-end restaurants with no free refills on drinks, but less expensive establishments like Bob Evan's, T.G.I.F and Red Robin can actually see a pickup in business during a economic recession. This does not mean these stocks are immuned to a bear market, but they will generally outperform the market. While families may cut back on $50 dollar dinners, people still have to eat out somewhere.
Americans always look forward to their two weeks of vacation where they can take the family down south or out west for some warm weather. But with the recent pain in the economy, many families are cutting back on the expensive family trips. Consumers are electing to stay local and take day trips to the local amusement park. This allows the family to still have fun but without the increased costs of transportation and a weeks worth of lodging.
Household goods are a no brainer. People still need items like aluminum foil, tape, tupperware, and sponges. Look to pickup stocks of companies that produce generics of household items. While consumers may need paper towels, they may go for the store generic brand to save a few bucks.
Defensive Stock Chart Examples
The below charts are of some defensive stocks which outperformed the market during the credit crisis of 2008.