Defensive stocks with offensive potential

  • “Defensive” stocks can get upside boost during broad market downturns
  • Consumer staples sector has climbed out of the YTD cellar
  • PG and COST have kept pace with this year’s bull market

The US stock market’s record-setting pace in 2019 may seem like the ultimate rising tide—all boats lifted, all the time!—but the truth is that strength has rotated throughout different areas of the market as the year progressed.

Although every S&P sector is currently up on the year, some are up much more than others, and over the past four months, industrials, financials, energy, tech—and even health care—have taken their turns as market leader while other areas have taken a breather.

These ‘defensive’ stocks have yet to break this year’s pattern of rebounding from pullbacks.

It’s impossible to know which sector will be the next hot hand, but whenever the market is pushing to new highs, as it has been recently, you’re bound to hear talk of the wisdom of rotating into defensive stocks because, you know, nothing lasts forever.

Hence the recent chatter about the attractiveness of the traditionally defensive consumer staples sector,1 which year to date has lagged the S&P 500 (SPX) by more than four percentage points (no surprise there), but in the past month has kept pace with the index and, in the past week, outperformed it.

That doesn’t necessarily mean defensive stocks will automatically be good long-side trading candidates if the broad market turns to the downside, though. They may be preferable for long-term investors who are mostly interested in minimizing losses while continuing to collect dividends, but short-term traders can sometimes find themselves buying stocks that merely weather a bearish storm better than others.

But what if there were defensive stocks that had some of the offensive characteristics of momentum stocks? Perhaps stocks that, although they are in defensive sectors, were competitive gainers even while the broad market was in an uptrend…

Procter & Gamble (PG), 1/2/19–5/2/19. Procter & Gamble (PG) price chart. Soared to record highs

Source: Power E*TRADE

Take a look at the above chart of Proctor & Gamble (PG), for example. It’s hard to get more “consumer staples” than PG, the 180-year-old household goods company. It’s been a long time since PG was part of the momentum conversation, but the stock is neck-and-neck with the SPX in 2019, despite recently experiencing its biggest pullback of the year.

Also, the chart doesn’t show that PG crushed it last fall when the market was going to pieces: In the last three months of the year, PG gained 10.5% while the SPX lost 14%. That’s defense that scores points.

Another example: Costco (COST), the store that, among other things, lets you buy large quantities of many PG products (chart below). Although it’s been moving mostly sideways for the past few weeks, as of yesterday COST was up around 19% on the year vs. the SPX’s 16% gain.

Costco (COST), 12/31/18–5/2/19. Costco (COST) price chart. Outpaced the bull

Source: Power E*TRADE

It’s true that nothing lasts forever, but stocks like PG and COST—names in defensive sectors that appear to have attracted the momentum crowd—have the potential to get an extra defensive boost from investors if and when the broad market turns lower. In the meantime, they have yet to break this year’s pattern of being buyable on dips.

Final note: PG beat its estimated earnings on April 23, while COST is scheduled to release its numbers later this month.

Market Mover Update: Advance Auto Parts (AAP) bucked yesterday’s market weakness, rallying more than 1.5% intraday. Alphabet (GOOGL) fell for a second straight day since its 7.7% post-earnings drop on Tuesday. Focus Financial Partners (FOCS) earnings release is now scheduled for May 9.

June WTI crude oil futures (CLM9) dropped sharply, approaching support at the market’s March highs around $60.50.

Today’s numbers (all times ET): Jobs report (8:30 a.m.), International Trade in Goods (8:30 a.m.), Retail Inventories (8:30 a.m.), Wholesale Inventories (8:30 a.m.), PMI Services Index (9:45 a.m.), ISM Non-Mfg Index (10 a.m.), Baker-Hughes Rig Count (1 p.m.).

Today’s earnings include: Cboe Global Markets (CBOE), Celgene (CELG), Fiat Chrysler (FCAU), Noble Energy (NBL), US Cellular (USM).


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1 Market bull skips high-flying FAANG names in favor of consumer plays. 5/2/19.

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