A defensive company is one that remains stable during various stages of the business cycle. Meanwhile, small-cap stocks tend to outperform and grow faster than their larger peers over time.
So, in theory, a defensive small cap should be a perfect pick for your portfolio.
Stock Spirits (LSE: STCK) and Fevertree Drinks (LSE: FEVR) are two such companies. But are these small caps a better choice than their large-cap brethren SABMiller (LSE: SAB) and Diageo (LSE: DGE)?
Outperforming
SAB and Diageo are two perfect picks for a buy-and-hold portfolio due to their steady growth and defensive nature.
Take SAB for example. At the height of the financial crisis, SAB’s shares had fallen by around 45% from their 2007 peak. However, by the end of 2009 SAB’s shares had surpassed their 2007 peak and surged higher by around a third, as investors sought solace in the company’s steady growth profile as the financial system collapsed.
Similarly, at the high of the financial crisis Diageo’s shares had fallen by a third. But by the end of 2009, returns were back to break even.
The FTSE 100 didn’t recover from its financial crisis losses until the middle of 2013.
Slow and steady
Investors trust SAB and Diageo during times of turbulence due to their history of growth.
According to my figures, SAB’s net income and earnings per share have grown at an average rate of 11% and 8% respectively per annum for the past decade.
Diageo’s earnings per share have grown at an average rate of 7% per annum for the past decade.
And this growth is set to continue for the next two years.
According to City analysts, SAB’s earnings per share will grow by 1% during fiscal 2016 and by 8% during fiscal 2017. Analysts estimate that Diageo’s earnings per share are set to expand by 2% over the next two years.
Don’t want to wait
SAB and Diageo are great defensive plays, but their growth leaves much to be desired. Fevertree, on the other hand, is one of the hottest growth stocks on the market.
Fevertree’s earnings per share are set to leap higher by 167% this year. Further earnings growth of 26% is pencilled in for 2016.
Additionally, analysts believe that Stock Spirits’ earnings per share can grow by 21% this year and 10% during 2016.
Paying for growth
Unfortunately, you have to be prepared to pay a premium to get your hands on the shares of Fevertree and Stock Spirits.
At present Fevertree is trading at a forward P/E of 38.6. Stock Spirits is trading at a forward P/E of 15.6.
Nonetheless, when you factor in growth rates, both Fevertree and Stock Spirits seem attractively priced. Fevertree is trading at a PEG ratio of 0.2 while Stock Spirits is trading at a PEG ratio of 0.7.
A PEG ratio of less than one indicates growth at a reasonable price.
