Adding defensive stocks to your investment portfolio is one of the best ways to lessen your exposure to risks from the stock market. Furthermore, because they represent one of the types of defensive assets and instruments, these stocks can also be bought and held as part of a defensive investment strategy. What exactly are the examples of defensive stocks?
Notable Examples of Defensive Stocks
Having a complete understanding of the different examples of defensive stocks is essential in building a defensive stock portfolio and a defensive investment strategy. Identifying these stocks involves looking at specific recession-proof industries or so-called defensive sectors that tend to remain afloat than other types of stocks such as cyclical stocks during economic downturns or bearish market conditions. Take note of the following:
• Utilities: Providers of essential goods and services such as electricity and heating, water, and telecommunication fall under the greater utility sector. Some of these companies trade in the stock market and the stocks issued by those operating in larger markets can be considered defensive stocks.
• Energy: An important emphasis should be placed on the energy sector because of its diverse composition. Companies operating in this sector include producers of energy such as specific upstream to downstream oil and gas companies, electricity generators and distributors, and those involved in the production and development of energy-related technologies and alternative energy sources.
• Health Care: The healthcare sector includes hospitals, pharmaceutical companies, producers of medical devices, and even insurance companies. Larger companies are considered defensive stocks because of their large market shares that equate to sustained sales and revenues even during economic and market downturns.
• Staples: Certain products fall within the consumer staples categories. These include food and beverages, toiletries and personal care products, household goods such as cleaning products, and tobacco and alcohol, among others. Most consider these products as bare-bone necessities and there is less likelihood that consumers would eliminate them from their budgets during periods of austerity.
Note that some specific types of stocks can also be considered defensive stocks. For example, consumer staple companies such as Procter & Gamble and Coca-Cola are large-cap stocks that are also regarded as defensive stocks because of their stable earnings. Some value stocks are also considered defensive stocks and as such, specific value investing tactics can form part of a defensive investment strategy.
There are established companies that have been regarded as defensive stocks as well. Think of tech companies such as Apple and Amazon that have weathered through several market and greater economic downturns due to the popularity of their products and services.
However, not all companies operating in recession-proof industries or defensive sectors can be considered defensive stocks. For example, smaller telecommunication companies such as regional internet service providers cannot go through recessions unscathed because of their small markets and limited revenue and profit potential.
Investors looking at prospective companies should evaluate them according to their respective sizes or market shares, the historical performance of their stock prices, their financial health and other fundamentals, and their track record concerning adaptability.