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We are updating our list of tier-one Defensive Stocks since so many of these stocks have run up and since lists need continual updating.  Our originally updated list of tier one defensive stocks was much larger and we are taking more of a "Value Investing" approach to SOME of our list of defensive stocks for the start of 2008.  All of our old tier-one stocks that aren’t on this list would easily make the tier-two list.

These are also not meant to be stock forecasts for 2008 where we are calling for these to outperform or underperform the stock market.  This is our new list of stocks that we would look for investors to pile cash into during periods of weakness during the first part of the year if they get scared in the market but also that want to hide cash somewhere in equities.

This list may change as prices change throughout 2008, and we are taking more of a value approach when applicable where we take into consideration features such as price to book, price to earnings, how far off of 52-week highs, and the dividend yields…among other things.  Here is the new list of Defensive Stocks from 247WallSt.com for the start of 2008:

Pepsico Inc. (NYSE: PEP)…. % off highs: 4.5%    P/E: 20.25    Dividend Yield: 1.9%
Notes:  Pepsico does actually have a lower yield than rival Coca-Cola (NYSE: KO), but we feel that could change in 2008 if the company wants to go aggressive.  It is also slightly more diversified and has a better nominal P/E ratio.  Pepsi shares also underperformed compared to Coca-Cola over the last 52-weeks.  PEP is up more over the last 5-years, but not over the last two years or one year horizon.  On a defensive trading day or week we think investors/traders will still also flock into KO shares, but we think that investors looking for defensive stocks will flock to PEP over KO for the time being if they are looking to stay defensive for anything longer than a few days or a week.

Anheuser Busch (NYSE: BUD)…. % off highs: 6%        P/E: 19        Dividend Yield: 2.5%
Notes: Budweiser has of course to deal with rising commodity prices, but we really think their partnerships with foreign premium brands have started to change their Bud-only perception that hurt the company over the last few years.  Unfortunately this one is so much larger than rivals that it’s hard to compare to others. 

McDonald’s Corp. (NYSE: MCD)…. % off highs: 9%        P/E: 30*    Dividend Yield: 2.5%
Notes: For starters it is very hard to call any restaurant a defensive stock, but it is important to recall that people have to eat and it is hard to forecast a scenario where the lower-end of the restaurant chains start losing drastic business.  We are concerned about some of the comparable sales being difficult to maintain.  But as long as this one keeps its monthly numbers up then we’d expect trader/investors to still flock here if they get nervous about the overall stock market.

Yum! Brands (NYSE: YUM)…. % off highs: 5%        P/E: 22.9    Dividend Yield: 1.6%
Notes: Again it is very hard to call any restaurant a defensive stock, but it is still hard to forecast a scenario where the lower-end of the restaurant chains start losing drastic business.  We do not like that YUM’s dividend is much lower than that of McDonald’s and it isn’t as far off of highs.  But McDonald’s has seen such a strong same store sales boost that we want to go for a less stellar performer with a far smaller market cap.  We also think its expansion internationally, especially China, will allow it to post solid returns with some growth stock aspects.  Brands KFC, Pizza Hut, and Taco Bell are the majors, but it also has Long John Silvers and A&W All American.  We wouldn’t be shocked if it acquires or launches a new brand in late 2008 or 2009.  We do want to note that MCD has slightly outperformed YUM over the last year, but traders will continue to focus on MCD on days where "they must go ultimately defensive" as long as its sales numbers continue to impress.

Reynolds American (NYSE: RAI)… % off highs: 8.5%    P/E: 16.3    Dividend Yield: 5.1%
Notes: Reynolds is favored over MO solely on valuation and because it is not in as much of an ongoing restructuring; Vector has a higher yield but it is too small to be truly defensive and its dividend is almost in the "too high" category.  It also has a higher yield than the larger MO and sells at better valuations on a price/sales metric with only a small premium on a P/E basis.  While we see smoking ultimately dropping off again in the U.S. and while we think more states and cities will impose public smoking bans, it is amazing how well these have held up.  Tobacco is one of the true defensive categories.

Proctor & Gamble (NYSE: PG)… % off highs: 4%        P/E: 22.8    Dividend Yield: 1.9%
Notes: Out of the consumer products companies, we think that even if P&G is by far the most valuable with a $170+ Billion market cap that it remains the go-to stock.  As long as we use deodorant, soap, and other personal products then this one won’t likely lose out.

Johnson & Johnson (NYSE: JNJ)… % off highs: 2.5%    P/E: 18.75    Dividend Yield: 2.5%
Notes: This is a tough call considering that it is a consumer products, drug, and medical device operator that had seen its share of problems.  But here we get the diversification among solid brands that aren’t going away.  Its near-$200 Billion market cap is larger than we’d like to see but that is not a comment about its comparable valuation measurements. 

Pfizer (NYSE: PFE)…. % off highs: 17%    P/E: 10.8    Dividend Yield: 5.6%
Notes:  It is extremely difficult to call Pfizer a value stock in the drug sector after you have seen how DJIA rival drug-maker Merck has performed.  But here we are looking at the value side of Defensive Stocks for 2008.  The P/E ratio, even considering a low-growth ahead, allows this to have a significantly better dividend while this one tries to claw its way back.  We think that the company knows it has to go make some transformative deals that will buy a newer and more diversified R&D and drug pipeline, although its current R&D and pipeline may actually be far better or at least "much less" on the bad side than it is given credit for.  If this was a year ago we’d be calling the better stock Merck, but the valuations on PFE are better for value investors and over the last year PFE is down roughly 10% while MRK is up over 30%. We still think traders will put funds into MRK on defensive days, but PFE now offers a significantly better "value" for longer-term defensive investors on a value basis.

We do want to warn investors that because 2007 saw so many implosions and because there were so many sudden mini bear markets in 2007 there is seeming to be more and more of a built in premium to these stocks.  We can’t call these being bubble valuations, but the "value" is in the defensive nature of these businesses rather than in the valuation metrics on most of these names.  The bad news is that the premiums seem excessive, but the good news is that many investors have to own stocks either way and these are some of the likely names they will turn to when they want to be defensive.

Jon C. Ogg
January 2, 2008