Yesterday I wrote about collateral damage and overshooting. Obviously some stocks got devalued for no just reason what so ever. Can we hunt down these opportunities? My recommendation was, and still is, no. However, there are sectors which have proven in the past to be more resilient and even suitable for times of recession and economic slowdown.
The primary characteristic for these companies is that their business performance is less sensitive or even encouraged by times of recession and economic slow down. These stocks are called defensive stocks.
The combination of an overshooting effect in stock prices the potential for recession makes buying defensive or cyclical stocks an interesting option.
Sectors which are considered to be defensive are consumer sectors such as tobacco, food, alcohol and retail companies (such as wall mart which has recently been recommended again by analyst Mark Miller after years of standing in place). Other, more riskier sectors, are energy, utilities and the defense industry. High dividend yielding stocks are also considered to be more defensive (intuitively these stocks can be thought of as bonds the more the dividend yield is guaranteed).
NY Time's Paul Lim recently wrote about a rather interesting, and unorthodox, strategy for the current slowdown. Instead of buffing up the portfolio with defensive stocks money managers, he says, are apparently betting on growth stocks which have actually over-performed defensive or value-oriented stocks in 2007 (For the complete article: Going for Growth, Even in a Slowdown).
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