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These corporations sell things we need. Food comes to mind, of course, but also fuel, prescription drugs, and "consumer staples" like toothpaste, soap and laundry detergent. We even need the services of funeral homes to bury our dead! The name "defensive" comes from the fact that if the economy is showing signs of faltering, you can defend your wealth by selling the stock in the corporations you are currently holding and buying the shares of these companies. While corporations that sell luxuries will likely see declines in sales and profits that will lead to falling stock prices, defensive companies will continue to chug along. We'll keep eating and a certain portion of the population will continue to pass away. Have you ever known a person who went to an alternating-day schedule of showering and tooth-brushing to save money because the economy wasn't doing well? Didn't think so.
Suitable for Investors concerned about the state of the economy. Also, investors who are simply conservative. Examples Proctor & Gamble (PG), General Mills (GIS), Kimberly-Clark (KMB), Clorox (CLX), PepsiCo (PEP), and Nestle (NSRGY.PK) In the news In Sour Economy, Some Scale Back on Medications - October 21, 2008 Connections The best defensive corporations, those that have been successful for several decades, can also be considered blue chip corporations. Explorations Using a financial site like Yahoo! Finance, chart the stock performance of one of the example corporations discussed above. Then, compare it to the performance of the Dow 30 or the S&P 500 (which represent the overall market) by overlaying one of these onto the same chart. See if the defensive companies sink less during times of recession than the overall market. A final word Recessions can be deep and take their toll on the values of the shares of all types of corporations, even defensive ones. However, it is likely that the values of defensive stocks will fall much less than the average stock. This begs the question: "If from reading the financial news it appears the economy is going into recession, why don't I just sell all my stocks and wait until the recession passes?" There are two answers: |