There is no denying we are in uncertain times with the stock market. The economy is still slowly growing, but the stock market is soaring. This has led to many analysts preparing for a crash. Of course, there are the naysayers who still think this market has a lot of steam to keep chugging along. If you are in the camp of a stock market decline, you need to protect your gains and the money you have invested from losses. By investing in great defensive stocks, you can do just this.
But what are defensive stocks? They tend to be companies that thrive when the market tumbles. For example, utility stocks are good defensive plays since people still need electricity even when the economy sours. But this post isn’t going to give you a list of utility companies. Instead it is going to give you 3 other defensive stocks that might be overlooked by the majority of investors. This will allow you to get in before they become the next hot stock to invest in.
3 Defensive Stocks Not To Overlook
#1. Colgate-Palmolive (NYSE: CL)
Just as people need electricity even when the economy turns south, so too do they need basic necessities. This is where Colgate-Palmolive comes in. They sell oral hygiene products, soaps and detergents.
On the surface there are some issues facing Colgate-Palmolive. The first is organic sales. Historically the company has averaged close to 5% growth in organic sales, however this has slowed to just 4% recently. As a result, some investors are cautious about this stock.
Furthermore, there is the issue of currency risk. Colgate-Palmolive does 75% of its business overseas, so a strong US Dollar eats away at revenues.
Those are the major issues with this company. But they have much more going for it. First, they have implemented a cost cutting program that is working fantastically well. Second, when the stock market crashed in 2008, Colgate was able to keep organic sales growth positive throughout the recession. Third, the company hedges against other currencies to help offset its currency risk.
And finally, they increased the dividend over 2% to $0.40 per share this month. They have increased dividends for 54 years in a row now.
So while there is some short term pain the company is experiencing, it doesn’t mean investors should abandon ship. The company continues to be stable and once they can right the ship and increase organic sales back to the historical average, the stock price will reflect it.
#2. Advanced Data Processing (NASDAQ: ADP)
Advanced Data Processing is one of the leaders in business processing services. In most cases, you know about ADP because they handle some or all of the payroll for your company. But they offer other business solutions as well.
Recently the company reported second quarter earnings in which they were able to increase revenues from $2.81 billion to $2.99 billion. They also increased net income for the quarter to $1.13 per share versus $0.75 per share for the previous quarter.
However, even with this good news, the company noted a cut to its outlook for 2017. Growth was expected to be in the 4-6% range for the year, but the revised estimate is closer to 0%, or flat. For revenue growth, they lowered estimates here from 8% to 6%.
Should investors be worried? Hardly. The cut in outlook is simply due to the uncertainty with the potential tax cuts by President Trump. Until this tax plan is known, many companies are in hiring limbo.
And should the stock market fall, ADP should hold up well. The economy as a whole is expanding, so the market pullback won’t be due to a recession. It will be more about the let down of no tax cuts by the president.
Once the tax cuts are known, you can expect ADP to hit their numbers going forward and for the stock price to climb as well.
#3. Microsoft (MSFT)
When you think of Microsoft, you think of the Windows operating system and a tech company. But you have to remember that the company bought LinkedIn. This is why the stock can hold up well during a market decline.
Second quarter earnings grew 3.6% and sales increased over a 2% margin compared to the previous year. Revenue grew to $26 billion. Financially, Microsoft is in a good position regardless if the market drops or rises.
Here is what Microsoft has going for it. First, PC sales are finally starting to stabilize. Second, their cloud offering is doing well and is contributing a solid part of the revenues. And third, Microsoft is getting into the Internet of Things game, which many predict will be the hot sector for years to come.
With LinkedIn, Microsoft is positioned no matter what happens in the economy. If it continues to grow, consumers will remain confident and start looking to switch jobs, hoping for a larger salary. If the economy goes soft, people who get laid off will start looking for work. In both cases, they will turn to LinkedIn to connect with other colleagues or to search for jobs.
Stock market volatility cannot be avoided unless you are not investing in the first place. But since we cannot predict when the market will drop, we have to protect ourselves as best we can when we have money invested.
This means investing in defensive stocks that will hold up well during tough times. This doesn’t mean they will not decline in value, but rather they are well positioned to continue to operate as best they can even during lean times.
These three defensive stocks fit this criteria and as a result should be considered when building a portfolio.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.