“Time To Go Defensive, Again?” (PEP, KO, BUD, TAP, KFT, CAG, CPB, HRL, MCD, MO, VGR, RAI, PG, CL, MRK, JNJ, NVO)

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If you ever heard the old saying "Be careful what you wish for, you may get it!" it sure seems like we are there.  It also makes you wonder if it is time to go back into Defensive Stocks.  The defensive stock plays are where investors plunk their money when they are less optimistic but still want exposure to stocks.  The DJIA is down over 150 points on the day so far, yet some of these defensive stock plays are barely down. 

Today and this week is the perfect storm for what the stock market was hoping for to deliver a rate cut:

  • Job creations negative for the first time in four years
  • Alan Greenspan says this is similar to 1987 and 1998
  • Weak as could be auto sales
  • Weak home sales
  • Credit woes and delinquencies spilling over
  • mixed retail picture 

These are the ones you eat, drink, and smoke,and they tend to be around medicines and personal products. Here are the basics for defensive stock plays:

  • You have to drink. Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) are usually a coin toss over performance versus relative value in the beverage plays.  Anheuser Busch (NYSE:BUD) is supposed to win because people drink more beer when they are miserable; or if you don’t mind crossing the northern border a tad you can always look at Molson Coors Brewing Company (NYSE:TAP). 
  • You have to eat.  Kraft (NYSE:KFT) maybe too tied to activists, Buffett, Phillip Morris, or whatever, but it’s monster play in the sector.  ConAgra (NYSE:CAG), a food giant that is fairly valued.  You can always look at Campbell Soup (NYSE:CPB) or even Spam-maker Hormel (NYSE:HRL).
  • McDonalds (NYSE:MCD) is deemed the best fast food play off the mid to lower income, as supposedly people will still eat out somewhere.
  • Smokers sometimes do rule.  Altria (NYSE:MO) is supposed to win since history has dictated that people don’t quit smoking when they are stressed out over job security and money.  Cramer had this as one of the TOP 2007 PICKS, but for different reasons.  You can always pick Vector Group (NYSE:VGR), or Reynolds American (NYSE:RAI) as well.
  • In personal products, Proctor & Gamble (NYSE:PG) and Colgate-Polmolive (NYSE:CL) tend to get into your pocketbook unless you stop shaving, washing hands, and brushing your teeth.  The choice of the two usually boils down to relative value and performance.
  • Go-to names in drug and medicine stocks are Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ).  A good runner up is Novo Nordisk (NYSE:NVO), even if it is and ADR lower in market cap and based in Denmark, as they are the major insulin play for diabetes treatments.

These are far from great exciting tech plays, but this is the strategy that traditional investors have used whenever it is time to go defensive.  As a reminder, if the stock market is going to really slide then almost everything falls with it.  Defensive stocks in theory are supposed to fall less and are the ones that traditional investors usually start tip-toeing back into first.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.