Sector Investing Ideas: Consumer Defensive
Posted on October 23, 2017 by Miranda Marquit

As you look for investing ideas, one way to narrow down the field is to consider sector investing.

With sector investing, you can take a look at an area that might be doing well and then choose stocks from that sector to invest in. A sector safety score using the Stocks for the Week app can be an effective screening tool.

One sector to consider as you move forward is what we call “consumer defensive.” These can be great stocks because they tend to be in areas that people need.

Consumer Defensive: Solid Performance in Any Situation

The main advantage of this sector is that you can usually count on a solid performance in any situation.

The types of companies involved in this sector are those that we tend to need. It doesn’t matter if the stock market crashes. You still need to eat, and you’re probably going to buy toilet paper. Here are some of the types of stocks you’ll find in this sector:

Pharmaceutical Retailers

These aren’t the big pharma companies. Instead, these are basically drugstore retailers. In this sub-section of the consumer defensive sector, you’ll find companies like GNC and the parent company of Walgreens. You’ll even find PetMed Express in this area.

Food Distribution

In this category, you won’t find restaurants — or even major food manufacturing companies. Instead, these are food distributors. It’s companies like Sysco and United Natural Foods that make up this category.

It’s true that these types of companies can struggle a bit during a downturn, but they tend to bounce back afterward. Look at how SYY has done over the last 10 years, and you’ll get an idea of the ability of these companies to bounce back.

Grocery Stores

Grocery stores are also considered in the consumer defensive category. Even if companies like SuperValu and Kroger struggle along with everyone else when times are bad, the reality is that they tend to improve against over time.

Check into the fundamentals to see that things are run well, and you could find yourself a solid value.

Discount Stores

When it comes to solid stocks likely to ride out a recession with grace, discount stores can fit the bill. Just look at how Dollar Tree has performed:

Even with some small hiccups, the reality is that discount stores do reasonably well, and even gain during a recession. After all, if you need to pinch pennies, where are you going to shop?

Other companies included in this sector are stores like Burlington and Target.

Farm Products

Finally, the consumer defensive category includes food sources like Fresh Del Monte and Tyson Foods. We all have to eat, and it’s easy to stick with these companies during a downturn. However, you do have to watch out for these types of companies sometimes. Different issues, including weather and global supply chain problems, can impact how things go in this category.

Investing in Consumer Defensive

As with any investment, it’s important to carefully consider the fundamentals of the company. While starting with the sector can be a useful way to get ideas, it’s important that you do your own research to see what works best in your portfolio.

As you can see, though, we can offer you some ideas of how to evaluate a company. There are buy, sell, and hold recommendations. Additionally, you can see the safety scores of individual stocks.

What’s interesting is that, even though the average safety score for the consumer defensive sector is 64, different categories have their own scores. Pharmaceutical retailers is an especially strong category, with a 97 average. Once you get into that category, you can take a closer look at the companies involved.

By clicking on a company, you can see its most recent recommendation, as well as look at the fundamental data. The app will even tell you how well your portfolio would have done if you had followed the latest recommendation. In some cases, the potential performance even beats a broad-based index fund.

The difficulty, though, is maintaining gains made through investing in individual stocks. Tools can help you make better decisions, but nothing is full-proof. Start by investing in funds — including funds that focus on sectors you are interested in — and once you feel more comfident in using research tools to make the best choices, you can start looking into individual stocks.

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Written by Miranda Marquit

Miranda is a financial journalist. She specializes in writing about beginning investing, long-term financial planning, and how to get your money to work for you -- allowing you to enjoy your preferred lifestyle.

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