This article originally appeared on Traders Reserve.
The action in the stock market over the past three weeks has been decidedly lower, and for good reason. After the impressive run over the last six months, stocks were vulnerable (some say overdue) for a pullback. So far, that pullback has been on the order of about 3% on the S&P 500 off its Feb. 18 high.
Of course, the big spike in oil prices due to the flurry of Middle East political upheaval is one of the big reasons why we’ve seen selling in stocks across the board. On Thursday, March 10, the selling resulted in the major averages — the Dow, S&P 500 and Nasdaq — falling below their respective 50-day moving averages.
So, what’s a trader to do when the bias in the broad market is decidedly in favor of sellers? The answer is to get defensive.
What is a Defensive Stock?
Before we get into our list of defensive stock picks, let’s quickly define the concept. Defensive stocks are those companies and industries whose performance and sales are not highly correlated with the general economic cycle. In other words, these are companies — and presumably stocks — that will deliver steady returns in boom or bust times.
Sectors such as consumer staples, health care, gold and other precious metals, utilities and preferred stocks are typically considered defensive plays. What these sectors have in common is that they aren’t likely to crater when the market or the economy turns south. Conversely, they usually don’t deliver superhuman returns the way tech stocks do during bull markets.
Here are five defensive stocks to buy now:
Defensive Stock #1 – Procter & Gamble (PG)
If you’ve visited your bathroom today, you’ve probably used a product made by Procter & Gamble (NYSE: PG). That’s because the consumer goods giant makes such ubiquitous brands as Head & Shoulders, Gillette, Crest and Charmin — and that’s just its bathroom-related brands. The company also makes cleaning products for the kitchen, for your pets, and for you children. If the market and/or the economy shift into low gear, PG shares are likely to see a bounce.
Defensive Stock #2 – Pfizer (PFE)
Drug maker Pfizer (NYSE: PFE) is another company whose brands are likely to continue being purchased no matter what’s happening in the economy. Although this big pharma stalwart always faces the prospect of losing revenue when proprietary drugs go off patent, it’s got plenty of drugs in the pipeline to keep the profits pouring in. The stock has done quite well of late, and if the market continues faltering, PFE is likely to hold up very well.
Defensive Stock #3 – Freeport-McMoRan Copper & Gold Inc. (FCX)
Precious metals such as gold, silver and copper are usually safe havens when the rest of the market or the economy at large suffers. Actual gold, silver and copper prices are surging due to the inflation trade, but investing in the metals themselves can be a volatile proposition. Mining stocks like Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) can offer a more stable alternative to investing in the metals themselves. They can also be good defensive plays. That said, the price of FCX shares have come under pressure over the past few months. However, at current levels, FCX shares may now be trading at a deep discount.
Defensive Stock #4 – SPDR Utilities (XLU)
Stocks in the utilities sector are considered to be the quintessential defensive play. There are plenty of great utility companies out there, but if you want to make sure you own the best of the best, then a good way to do so is via the SPDR Utilities (NYSE: XLU). This exchange-traded fund (ETF) contains the biggest and best publicly traded utility stocks, and that gives a defensive investor plenty of exposure to the utilities — and plenty of diversity.
Defensive Stock #5 – iShares S&P U.S. Preferred Stock Index Fund (PFF)
If investors hunker down and start getting more conservative with their capital, we could see a decided move into dividend-paying sectors. One of the best ways to participate in dividend-paying equities is via the iShares S&P U.S. Preferred Stock Index Fund (NYSE: PFF). Preferred stocks are a sort of cross between regular stocks and bonds, and the best part of preferreds is they pay a guaranteed dividend. That guarantee makes PFF a very attractive defensive play during times of market turmoil.
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