Seeking defensive portfolio picks for turbulent times

The Globe and Mail, Number Cruncher

By Gary Christie 

September 5th, 2019

In The Globe And Mail, Gary Christie uses Strategy Builder to search for consumer defensive stocks with below-average price-to-earnings ratios relative to the broad market, positive earnings-per-share growth and positive price performance year-to-date

What are we looking for?

Consumer defensive stocks with attractive valuations, earnings-per-share growth and positive price performance year-to-date.

Market volatility remains elevated: The VIX, sometimes referred to as “the fear index,” remains above its 50-day simple moving average at the 16 level. The S&P 500 remains below its 50-day moving average, giving us a bearish bias on the broad market. In the short term, the index is ranging between 2,950 resistance and 2,820 support as the market decides which direction to take next. A break below support would give us a downside target of 2,720 to test June lows. Utilities, real estate and consumer staples sectors remain the top sectors in terms of performance relative to our benchmark, the S&P 500.

Consumer staples stocks are considered non-cyclical. If the economic environment starts to worsen, the demand for consumer staples should remain constant, making the sector an ideal defensive sector and something to consider during these volatile times. It’s worth noting that the Consumer Staples Select Sector SPDR Fund (XLP) has shown positive historical performance during the historically bearish September months. The sector has outperformed the S&P 500 60 per cent of the time in September over the past 20 years, with an average return of 1.3 per cent.

The screen

We will be using Trading Central Strategy Builder to search for consumer defensive stocks with below-average price-to-earnings ratios relative to the broad market (the P/E ratio for the S&P 500 is 19); positive earnings-per-share growth and positive price performance year-to-date.

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What did we find?

Topping our list is Tyson Foods Inc., the largest U.S. producer of processed chicken and beef, which has the best year-to-date share-price performance on our list at 69.6 per cent. It sells 90 per cent of its products through various U.S. channels, including retailers, food-service distributors, restaurants and non-commercial establishments such as schools and health-care facilities. In addition, 10 per cent of the company’s revenue comes from exports to Canada, Mexico, Brazil, Europe, China and Japan. With a current price-to-earnings ratio of 15 and a five-year historical EPS growth rate of 5.2 per cent, the stock may have a lot more room to move higher while markets remain neutral to bearish.

Packaged food giant General Mills Inc. has made an impressive rebound off its December lows. Fully 74 per cent of its revenue is derived from the United States, although the company also operates in Canada, Europe, Australia, Asia and Latin America. The company’s current dividend yield is at 3.8 per cent, which is the highest in our list, making it a solid defensive name to hold in case of turbulent times in the markets.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

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