Donald Trump’s recent election victory has stirred up the stock market. Just like after the Brexit vote in Britain, shares seem to be moving either up or down as the total sum of investors tries to anticipate what might happen next.
However, investing by aiming to predict macroeconomic outcomes is a pursuit fraught with difficulty. You’ve probably heard the term ‘sector rotation’, which is what some fund managers appear to do at times to back their macroeconomic judgements.
But exceptional investors such as Warren Buffett don’t bother with any of that stuff. He’s well-known for not trying to predict what the economy might do and for focusing on what the companies he’s invested in are saying about their businesses.
Evergreen businesses
I’m keen on defensive businesses that are growing. These are firms that deal in some kind of evergreen consumer product that continues to see stable demand from customers whatever the economic weather. Such firms tend to generate consistent cash flow that drives rising dividends.
If the Trump effect is pushing the share prices of these great firms down now, I’m rejoicing, because quality items don’t go on sale very often. Other investors can rotate away all they like, but I’m buying more of the defensives, because I think they will deliver a good total return for me over the long haul.
Pharmaceutical giant GlaxoSmithKline (LSE: GSK) and energy provider SSE (LSE: SSE) are two growing defensive firms with share prices that have weakened since the US election. GlaxoSmithKline is down just over 10% since October and SSE has eased by more than 8%.
Decent forward prospects
At today’s 1,546p share price, GaxoSmithKline trades on a forward price-to-earnings (P/E) ratio of 14 for 2017, and at 1,469, SSE’s forward P/E ratio sits around 12. Taken together with forward dividend yields of 6.3% for SSE and 5.2% for GlaxoSmithKline, these valuations don’t look too rich given the firms’ forward prospects.
City analysts anticipate 10% growth in earnings for GlaxoSmithKline during 2017 and a 4% uplift for SSE. Meanwhile, in recent updates, both firms remain upbeat about their own short-, medium- and longer-term prospects.
It seems unlikely that Trump’s presidency will have a detrimental effect on either GlaxoSmithKline’s or SSE’s ability to keep grinding on, generating cash and paying an ever-increasing dividend. So owning shares in these firms gives investors an opportunity to gather those dividends and reinvest the proceeds into these same firms to create a compounding pot of invested funds.
Watching the downside as your funds grow
I reckon a focus on compounding with growing, defensive businesses like these is one of the most effective ways to protect your portfolio from downside risks while growing your capital. Such an approach is what worked so well for Warren Buffett. He tends to buy more of the great companies he owns when their share prices fall, and Trump-induced share price weakness now looks like an opportunity to get a head start on the compounding process, if you stick to growing defensive firms such as GlaxoSmithKline and SSE.
