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. It’s unlikely that people will go to an alternating-day schedule of showering and tooth-brushing to save money if the economy is not doing well. They will instead find other ways to conserve.

Suitable for Investors concerned about the state of the economy. Also, investors who are simply conservative.
Examples Proctor & Gamble (PG), Kellogg (K), Kimberly-Clark (KMB), Clorox (CLX), and Nestle (NSRGY.PK)
In the news Investors are piling into boring defensive stocks like P&G as 2018 comes to an end – November 30, 2018

Americans can’t afford U.S. medication, need a safe alternative – November 12, 2014

Campbell closing plants as soup consumption falls – September 27, 2012

Campbell Looks Way Beyond Tomato Soup – August 9, 2012

Frustration With P&G Grows – June 20, 2012

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:

  1. It is very difficult to “time the market”. You have to choose the right time to sell your stocks and later to pick the right time to purchase stocks again. Basically, your timing has to be right twice, which is very difficult to achieve.
  2. Also, there’s the chance that pessimistic news about an impending recession turns out to be wrong. If you’ve sold out, you’ll be left scratching your head as the economy and stock market move higher.

Finally, the solution to this problem could be your deciding to go on offense. See Counter-Cyclical on the left for ideas on how you can continue to build your wealth right through a recession.