- Defensive stocks aren’t easy to define in the age of disruption.
- Traditionally defensive companies may have trouble living up to their reputation.
- Some growth-oriented stocks may display defensive characteristics.
What’s a defensive stock? It’s a simple question that used to have a simple answer. In years past, defensive stocks were reliable, conservative, boring investments in the consumer staples, utilities and health care sectors. These companies generated steady cash flows, paid solid dividends and didn’t have “dot-com” in their names.
More recently, however, there’s been a discernable shift in investor views of what constitutes a defensive stock. Many businesses that were previously considered defensive — including food, tobacco and telecommunications firms — have been disrupted by technology advancements, changing consumer behaviour and fierce competition in a global economy.
As investors search for defensive stocks ahead of the next recession, they may find that a broader definition is warranted.
“A defensive stock is one in which a company’s earnings and revenues have the potential to hold up fairly well during a recession,” explains equity portfolio manager, Alan Wilson.
“So the key question is, will the companies that have displayed defensive characteristics in the past continue to do so in the future? I’m not so sure about that,” Wilson says. “It may depend a great deal on the cause of the next downturn.”