A ‘Front 5’ and 2 ‘Safeties’ for a Defensive Stock Battle

Rudy Martin

This weekend’s Super Bowl may or may not turn into a defensive battle, but defense sure sounds like a great investment strategy for this year’s stock market.

Following assaults on new highs this month, first the volatile U.S. market was blindsided by a weak manufacturing report from China. Then negative events in Turkey, Argentina, Ukraine and Egypt piled on the pain.

Back here at home, sports commentators always talk during the playoffs about the importance of consistency and how a team reached the finals because it has "a habit of winning."

Today I want to share with you how you can get into that same habit with a team of defensive stock winners that could be worth betting on in 2014.

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Internal Sponsorship

5 Front-runners to Outrun the Bears

My latest search for consistently winning defensive stocks produced two intriguing lists.

  • Substance indicated by market capitalizations of at least $100 million; and
  • Defensive Superiority measured by consistently producing positive investment returns in each of the last 10 calendar years.

The screening produced an impressive "front five" contenders to resist bear thrusts.

  • The U.S. auto fleet has aged because of the financial meltdown. Car owners, hammered by the downturn and pinched by the sluggish recovery, are doing more of their own vehicle maintenance. That is a perfect storm for retailer AutoZone Inc. (AZO).
  • Utilities have traditionally been relatively steady, but middle-of-the-pack, performers. So it shouldn’t be surprising to find Chesapeake Utilities Corp. (CPK) on our defensive line.

    Considering this brutal winter season, CPK should put up some good numbers this year. In fact, this company’s 10.8% compound annual total return over the past 10 years is impressive for most any stock.

  • No part of the stalwart consumer staples sector is as basic as the packaged food industry, and few companies represent this group like General Mills Inc. (GIS). It’s hard to imagine anything more defensive than food.
  • Waste products accumulate even in hard times. Geographically diversified Waste Connections Inc. (WCN) serves residential, commercial and industrial and customers in 31 states with private and municipal solid waste collection, transfer, disposal and recycling services.

    If General Mills does steady business in good and bad times, the company that collects its spent packages should also do OK.

  • Railroading is an old business that has held its own in recent years. When oil is expensive, railroads benefit from their fuel efficiency. When petroleum is more plentiful, more of it ends up transported by rail.

    That win-win "moat" for the rail industry undoubtedly led investment legend Warren Buffett to acquire Burlington Northern Santa Fe.

    If railroads are good all-weather holdings for the world’s premier investor, then the dominant firm in servicing that industry — Westinghouse Air Brake Technology (WAB) — should make an outstanding defensive player.

Click the image to see the full data set

My search for defensive portfolio candidates also looked at another measure of consistency — ability to outperform the market, as measured by the S&P 500 index — year-over-year.

2 ‘Safety’ Picks for My Stock-Market Super Bowl

Considering that roughly half of all stocks should be expected to best the S&P’s return in any given year, I was surprised that only the two members of the table below outperformed the market gauge in each of the past 10 calendar years.

But even though both stocks in the table below surrendered territory in 2008 (but beat the S&P because their setbacks in that disastrous year were less than the index’s), consistently beating the market produced better defensive performers than the list of no-negative-years stocks.

Both of the stocks profiled below rewarded shareholders with compound annual returns of at least 20% over the past decade.

Only one of the five members of the above table returned more than 20% per year on average over the period.

Click the image to see the full data set

As with the first list, both these consistent index beaters are logical defensive plays.

  • Petroleum has been a dominant force in U.S. business for well over a century. Magellan Midstream Partners (MMP) has almost 10,000 miles of pipelines.

    If petroleum isn’t on railroads supported by Westinghouse Air Brake Technologies, there’s a good chance it goes through an MMP pipeline.

  • Along with food products provided by General Mills, even in hard times, people will need medical treatments.

    In addition to a growing number of aging Baby Boom patients, the "Affordable Care Act" will make the products of Mesa Laboratories Inc. (MLAB) available to more people.

It is still too early in the year to know if a purely defensive strategy will be right for 2014. I’ll watch the action and keep Global Trend Trader readers well-informed.

Happy Trading!

Rudy

P.S. James DiGeorgia has discovered a groundbreaking deal by one North American government — one that’s set into motion a phenomenon we haven’t seen in more than 100 years. He calls it the "Rockefeller Effect." Click this link here to see how it could lead modern-day investors to double-, even triple-digit gains.