Is it time to sell flyers Unilever plc, National Grid plc and British American Tobacco plc?

Defensives Unilever plc (LON: ULVR), National Grid plc (LON: NG) and British American Tobacco plc (LON: BATS) look pricey.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Is it time to bank some gains in the defensives? We’ve seen the shares of defensive firms enjoy a good run up over recent years. At today’s 3,668p, consumer goods multinational Unilever (LSE: ULVR) is up around 184% since 2009. Energy transmission system operator National Grid (LSE: NG) is up 121% since 2010, and cigarette manufacturer and distributor British American Tobacco (LSE: BATS) has put on 214% since 2009.

Valuation spikes

Valuations look full. Unilever trades on a forward price-to-earnings (P/E) ratio of 23 for 2017, National Grid’s forward P/E rating is almost 18, and British American Tobacco’s is just over 19. The fallen pound seems to have caused a sharp up-spurt in these firms’ share prices as foreign trade becomes worth more when converted to pounds. When I see sharp moves up on a chart after a long period of steady rising, it makes me think that it’s time to consider taking some money off the table.

Such patterns on a share price chart can potentially end up looking like blow-offs and could presage change ahead. Maybe the relative weakness in the pound will reverse. Maybe global growth will slow. Many things could alter the steadily rising pattern with which we’ve become familiar for these shares.

Valuations move in cycles

One driver for the defensives’ high valuations is that such firms become popular during times of uncertainty and we’ve seen plenty of that in recent years. However, the valuations of defensive companies can move in cycles. Should the macroeconomic environment start to look more benign, there’s a good chance that we’ll see reversion to more modest valuations because of that.

However, timing the market is difficult. These are good firms and they’re as far away as it’s possible to be from the cyclical business pressures affecting many other companies on the stock market. An investment horizon measured in years could lead to a good outcome eventually regardless of any over-valuation creeping into things now.

Sell some and hold some?

If I’d been holding Unilever, National Grid and British American Tobacco for the last six or seven years I would take profits now while still allowing a smaller core holding to run. Yet some market commentators expect multinational shares and defensives to be surprisingly strong performers for the rest of 2016.

Whether to buy, sell or hold at any particular point is always a very personal decision. But owning shares in good quality defensive firms such as these three puts you one step ahead and makes the issue of timing less important — as long as your investment horizon stretches into years rather than just days, weeks or months.

Looking forward, City analysts expect Unilever to grow its earnings by 8% next year, British American Tobacco by 9% and National Grid’s earnings to be flat. These aren’t declines in earnings, so perhaps the best strategy is to hold on tight after all.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »