Is There Still Time to Buy Into the Ultimate Defensive Portfolio?
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Back in January, surrounded by uncertainty in the market, I put together an article called the ultimate defensive portfolio, highlighting four stocks that I believed would protect any investor against market tantrums and provide a decent return no matter what happened in the wider market.
Nearly seven months on and the market has hit new all-times highs followed by extreme volatility and 300+ point moves to the downside. Despite all this, how has the portfolio performed and is there still time to buy?
Overall, the whole portfolio has beat the S&P 500 by 19.3%, but the majority of this gain was thanks to Carriage Services, which, at one point, was up an impressive 45%. That said, none of the stocks significantly underperformed the index and the worst performer, Wal-Mart, only underperformed by 1.55% -- including dividends this return rises to 10.2% (American States has the same total return).
Is there still time to buy?
After the last six months, the market has moved significantly and the situation has changed, however, one of the best things about defensive stocks is that their outlook is long-term and not affect by short-term movements. That said, after the recent volatility in the markets, are these stocks still buys or should investors hold fire for now?
I originally selected Carriage Services due to the company’s low valuation in relation to its peers and the company's impressive predicted growth rate. Well, it achieved the growth in the first quarter; EPS grew 21.4% to $0.34, while cash flow grew 314% to $9.1 million. Moreover, Carriage is in line to increase EPS 92% to $1.23 for full year 2013, putting it on a forward earnings multiple of 14 -- not much higher than the valuation in the original article.
I originally selected Carriage for its impressive predicted growth and low valuation and it looks like the company is well on the way to achieving its growth and the valuation is still low, and on that basis, the stock is still a defensive buy.
Wal-Mart was originally selected for its size and history and in this short period, nothing has changed. The company sold off slightly when it reported results that came in below expectations during May but this provides a good buying opportunity.
Indeed, the sell-off followed by recent market volatility has forced Wal-Mart down to a valuation that is lower than its peers in the rest of the sector. Wal-Mart is currently trading at a forward P/E ratio of 12.75, below that of close peer Costco, which trades at a forward P/E ratio of 21.7. Moreover, on a current TTM P/E ratio of 14.6, the company is trading at about the same valuation as it was when first called in January (14.3).
Overall, still a good buy as an ultimate defensive company.
American States Water
American States still makes the portfolio. Originally, the company was selected for its payout history and this remains the same with the second longest payout history on the market. The company has been paying and raising its dividend every year since 1955; 58 years!
In a defensive portfolio, you need a stock that offers secure dividend payments and there are a few other than American States Water. The company generates a 28% net profit margin and has a dividend cover of two times, giving plenty of free cash and further room to increase the dividend.
American States gives an investor peace of mind with its dividend history and the company's product (water) will always be in demand so there are no cyclical worries.
Reynolds originally made the cut as it was cheap in its sector and offered a solid dividend yield. However, the company has put in a good performance during the past six months and it would appear that it is no longer the cheapest in its sector, for that reason I do not believe the stock is still safe to buy.
On a forward P/E ratio, Reynolds is trading at 14, while sector peer and larger rival Lorillard and Altria are trading at ratios of 12.7 and 13.5, respectively. In addition, global behemoth, Philip Morris International, trades at a forward P/E ratio of 13.9. Reynolds is also struggling with falling sales and although the company has just released it own brand of e-cig in the fast growing market, I do not believe the company is as defensive as it once was -- the sector offers better opportunities.
So, overall, it would appear that the majority of the companies in the original article still present compelling investment opportunities with a defensive nature. All apart from Reynolds American, which I believe currently looks overvalued, are worth a look. Investors looking for a cheap defensive pick in the tobacco sector should look to Reynolds' smaller, cheaper peer Lorillard.
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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!