We are all well aware of the sell-off that has been happening in equity markets around the world. Because of it, the stocks I hold have taken a hit. This is likely the case for many investors, given that the cause of this crash (the coronavirus) affects most sectors.
The sectors hardest hit are those with high exposure to the public’s wants as opposed to needs. Examples include travel firms and retailers. On the other side of the coin, defensive stocks, representing needs, have taken less of an impact from this sell-off.
A defensive stock is categorized as such because its revenue and profits are less sensitive to the well-being of the overall economy. This is usually because the goods and services such firms offer have inelastic demand. Goods and services like these are things people like you and me need to function on a day-to-day basis.
Buying such stocks can be used to add protection during a market crash. In theory, they should have sustain less of a negative impact than other sectors.
One of the most inelastic products on shelves is cigarettes and other nicotine goods. The addictive nature of these products mean that most consumers will continue to buy them irrespective of the amount of income they have, or whether it is good for their health.
For investors, this means that the impact on British American Tobacco (LSE: BAT) during this sell-off should be limited. The share price for the firm has taken a tumble, but it is still higher than levels we saw in 2019. This cannot be said for many other FTSE 100 companies!
In the latest earnings report delivered about a month ago, the key financials for the business were steady. Revenue was up 5.7%, though profit was down 3.2%. Financial ratios were similar in either beating or missing expectations within a small margin.
For a large, established business, this is a good set of results. Due to the size (and inelastic demand) of the firm and the products made, it will be rare to see double-digit growth year on year. But the fact that results are steady confirms to me that it is a defensive stock which will hum away slowly during good times and bad. This makes it attractive currently.
Anything on the shelf?
Tesco (LSE: TSCO) is another good example of a defensive stock. This appeals to me because the goods offered by supermarkets are going to be in demand all the time. I recently wrote about J Sainsbury being attractive near 20-year share price lows. Tesco is another option, being one of the big four supermarkets in the UK.
Despite the FTSE 100 falling over 30% since the start of the year, the Tesco share price has only fallen 15%. This highlights its resilience and how investors believe the impact of the virus will not unduly trouble the firm.
Added to this is the fact that the dividend yield is around 3%. Not a huge number I admit – but importantly the dividend cover is over 2. This makes it likely that the dividend will continue to be paid, in my opinion. This at a time when I imagine a lot of firms will cut their dividends, reducing dividend yield going forward in other sectors. With the main boxes ticked, Tesco is on my watchlist to buy.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
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Jonathan Smith does not hold shares in any firm mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.