Companies in the consumer staples sector are often less sensitive to big economic fluctuations because people are unlikely, unwilling, or unable to cut these items out of their budgets, regardless of their financial situation. Companies that manufacture or distribute food, beverages, tobacco products, personal and hygiene products, and non-durable household goods make up the consumer staples sector. Unlike stocks in the consumer discretionary sector, which includes companies like car manufacturers and hotels, stocks in consumer staples tend to hold steady when people reduce their spending during a recession. These companies produce goods or offer services that consumers will buy regardless of the state of the market or economy. Fundamentals like food, healthcare, and utilities are just a few of the many types of industries a defensive sector fund might invest in.
- During tough times, consumers will reduce spending on luxury items, such as entertainment, travel, and high-end clothing.
- Names like Philip Morris, we think, right now is a pretty attractive name; Coke is another name that we think is also particularly attractive in this environment.
- Fundamentals like food, healthcare, and utilities are just a few of the many types of industries a defensive sector fund might invest in.
- An example of a portfolio holding that has illustrated this thesis is UnitedHealth Group (), one of the largest health insurers in the US.
- Utility companies also get another benefit from a slower economic environment because interest rates tend to be lower.
When other stocks are soaring, defensive stocks are more likely to perform below the market. Defensive stocks tend to perform better than the broader market during recessions. However, during an expansion phase, they tend to perform below the market.
Broadly speaking, consumer staples are essential products that we use daily such as food, beverages, household and personal care products. Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information prtrend is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.
Morningstar Rating for Stocks
That is a strong argument that defensive stocks are objectively better investments than other stocks. Warren Buffett also became one of the greatest investors of all-time in part by focusing on defensive stocks. Among the hardest-hit segments was packaged foods and meats, a competitive industry due to the presence of lower-priced private-label alternatives. As input costs eased, brand-name food companies stepped up discounts and advertising spending to attempt to gain market share. Investor sentiment also shifted against this segment due to worries about how new weight-loss drugs might impact demand.
Consumer staples sector
While we view this shift as a temporary byproduct of the economic backdrop, we see continued opportunities for growing online penetration. We see opportunities in consumer packaged goods, where nearly 60% of our coverage trades in 4- or 5-star territory. «Defensive» stocks can be found in many industries if the firm has strong earnings, innovation, pricing power, and a track record of disrupting the status quo. You can also learn more about sector investing and read more recent market insights and commentary from Fidelity’s portfolio managers. Shuleva says he’s found the strongest opportunities among beverage companies, including the main soda companies.
Companies that supply these types of goods and services are usually either called consumer discretionaries or consumer cyclicals. For DIY investors, you can use Syfe Trade to invest in specific stocks and ETFs. From now to 31 March 2022, you get to enjoy 5 free trades and super low commissions of US$0.99 per trade thereafter.
Advantages of Defensive Stocks
Additionally, we see that almost all defensive sectors are trading above their historical P/E ratios despite having had a rough year in 2020. We could also look at the three- or five-year averages to get a longer-term valuation picture. While no stock is completely immune to market volatility, consumer staples stocks tend to decline much less during corrections. At this time of writing, the broad-based S&P 500 index has slipped nearly 7% in the year to date, but the S&P 500 consumer staples sector is only down 4% for the same period.
During contractions, personal income and personal spending are usually lower and spending on consumer discretionary products decreases. The reduced demand for consumer discretionary https://traderoom.info/ products is usually a precursor of lower sales for the companies that produce these products. Lower sales can lead to worsening economic conditions and greater economic contraction.
The purchase of consumer discretionary products is often compared with the purchase of consumer staples. Their non-cyclical nature means that no matter where we are in the economic cycle, the average consumer will still buy necessary consumer staples products in more or less the same quantities – regardless of their price. Within consumer defensive stocks, we highlight Tyson Foods, Estee Lauder, and Kellogg. Shares of major pharmaceutical companies and medical device makers have historically been considered defensive stocks. However, increased competition from new drugs and uncertainty surrounding regulations mean that they aren’t as defensive as they once were.
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Its top three holdings are Coty Inc, Monster Beverage and McCormick & Co. A growing economy—expansion to peak—is usually characterized by stronger earnings for businesses and consumers. A contracting economy—contraction to trough—generally has the opposite effect. Consumer discretionary is a term that describes goods and services that consumers consider non-essential but desirable if their available income is sufficient to purchase them.
The utilities industries can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel, and natural resource conservation. Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies. Within the sector, he says that outperformance has been driven by the most defensive types of companies, including large-cap pharmaceutical companies, large-cap pharmaceutical distributors, and large-cap managed care companies.
A value stock traditionally has a lower price when compared to stock prices of companies in the same industry. This indicates that the company may be undervalued, as investors are not expressing as much interest in such companies. The most commonly used way to check for value is with the price-to-earnings multiple, or P/E. A low P/E multiple is a good indication that the stock is undervalued. We aren’t blind to consumers’ search for value amidst strained financial resources, and the near-term impact this is having on retailers.