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Defensive stock trading is an all-weather type of investment. It can keep your pockets stuffed through market turbulence, even when the wider market is struggling. People can’t cut back on consumer staples (think beverage and tobacco products, household goods, personal products and food and drug retailers).
Here are 5 consumer defensive stocks that deserve your attention.
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Overview: Consumer Defensive Stocks
The consumer sector produces products people need almost on a daily basis. Consumer defensive stocks are great investments in virtually any economic environment, including economic slowdowns.
Unlike cyclical stocks, which are highly dependent on the economic cycle, defensive stocks generate stable profits through all stages of the economic cycle. The simple idea behind investing in defensive stocks is to shield against significant decreases in share prices, which occur during either bear markets or market corrections.
Although consumer defensive sectors offer price stability through the economic cycle, the tradeoff is that they experience less growth during market upswings compared to higher-risk, cyclical sectors. The industry groups considered to be defensive include:
- Consumer staples
Best Online Brokers for Consumer Defensive Stock
Online brokers don’t just let you execute and track stock trades. They provide extensive research material, tools to backtest strategies and charting capabilities for better market analysis. Here’s a list of the best brokers in the industry.
Intermediate Traders and Investors
Features to Look for in Consumer Defensive Stocks
- Market share is a huge determinant of stock profitability. It’s the proportion of an industry’s total output, capacity or sales that a company is responsible for over a given period. Capturing a dominant share of the market is valuable for 2 main reasons — companies you invest in that capture the lion’s share of the market tend to offer the highest profits and keep up with competitive threats. A leading brand will easily secure a lot of shelf space with retailers. The aim is to increase its sales margin faster than the larger industry, therefore increasing market share over time.
- Same-store sales growth helps put revenue data in perspective. Also referred to as comparable store sales, it’s the measure of revenue and sales growth from existing store locations. This metric helps you assess the operating momentum of a business, whether it attracts huge customer traffic and stands out from the competition. Weak comparable store sales could be a sign of scaling business challenges.
- Profit margins may help you evaluate the earnings power of consumer staple companies. Top consumer staples companies post market-leading profit margins attributable to large sales bases, valuable brands and effective operating structures. Higher margins on this metric often indicate stronger earnings and a greater stock pricing power.
Defend Your Portfolio Against a Stock Market Shock
Having a few consumer defensive stocks can help you hedge against stock market shocks. Although these stocks aren’t the best performers in a bull market, they usually go up when the market slips. A portfolio containing defensives is more likely to offer a dividend. A regular income is always nice to have, especially during tough economic times.
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