What Are Defensive Stocks?


What do we mean when we say that a stock is defensive? As the name suggests, these are the stocks you can count on when the market is moving around a lot. These are the stocks that don't lose as much value when the market goes down as most high beta stocks. So, what do defensive stocks look like, and what are the benefits of having defensive stocks in your portfolio? Let's look at some of the things that defensive stocks have in common and some examples of defensive stocks in India. 1. Things that never go out of style When you talk about traditional industries that never go out of style, food, FMCG products, etc. come to mind. Food and cleaning products are used in different ways, but what they are used for doesn't change much. In fact, the only time that these products become more popular is when the economy gets richer. Because of how stable their demand is, they tend to be less volatile and can keep their price and returns even when times are bad. Hindustan Unilever, ITC, Marico, Britannia, and Havells are all great examples of Indian defensive stocks. Of course, they might not give you the same kind of return that most high beta stocks do, but that's not the point. The main idea is to put your attention on stocks that can protect the value of your portfolio when times are bad. 2. Businesses that are always in demand This can be a continuation of the last point, but there are many people who can benefit from this trend. Aside from food and FMCG, this group also includes stocks in pharmaceuticals and cement. For instance, the need for cement can be put off, but it can't be eliminated. Because of this, cement stocks tend to keep their value even when the market is bad. It's an example of prices changing to reflect more realistic growth expectations. But there hasn't been much of a drop in demand for these goods. 3. Dividend yields that are appealing Stocks with a high dividend yield are a good example of defensive stocks. Most of the time, defensive stocks are those with dividend yields of 6–7% or more. Because they generate annuity income, the attractive dividend yield makes them very attractive at lower levels. In India, this category includes stocks like NTPC, Coal India, NMDC, REC, Chennai Petroleum, IOCL, and BPCL. They come from many different industries, but what they all have in common is a good dividend yield. In many cases, the yield on the dividend is better than the yield on the bond itself. 4. Big businesses with strong business plans We've seen this happen with companies that have been around for a while and have grown to the point where repeat business doesn't take much work. In this group are companies like TCS, Infosys, Reliance, Maruti, etc. Even when these companies' stocks go down on the stock market, investors know that they will eventually go back up. And over the years, these stocks haven't let their investors down very often. When the market is bad, these stocks can be good places to put your money. They might not give you the kind of returns that many midcaps do, but like most defensive stocks, they do a great job of protecting you from the risk of going down. 5. Priced conservatively in terms of P/E and P/BV One of the most common characteristics of defensive stocks is that their P/E and P/BV ratios are still relatively low. If you look at companies like Reliance, IOCL, BPCL, and NTPC, you'll see that most of them are priced in a way that makes them seem like good deals. Of course, most of the time there isn't much room for growth or the size works against them. But you can be sure that these stocks will do pretty well even if they go down. Also, when the market goes down, they make a case for buying, and you can be sure that these stocks will go up again in the long run. Since valuations change quickly in their favour, having a low P/E and P/BV is an added benefit. 6. The business doesn't really follow a cycle Commodity businesses like steel, aluminium, and zinc can be pretty cyclical because the prices of metals are largely based on the international prices on the raw materials. When the economic cycle goes against them, there is a big chance that prices will go down. Second, when these stocks go down, it takes a long time for them to get back to where they were before. This is because commodity cycles tend to last longer. Because of this, most metals and commodities stocks are not good choices for a defensive bet. Even if they have good price-to-earnings ratios, they do not become basket cases. More often, defensiveness comes from stocks that have a moat that sets them apart. 7. Low beta stocks are good defensive bets Most of the time, stocks with low betas are those that are good for protecting your money. Think about the Indian Nifty. Stocks with Betas that are much lower than 1 include Cipla, ACC, Bajaj Auto, Hindustan Unilever, IOCL, and Infosys. Even though these stocks may not do well in bull markets, they tend to hold their value better when markets are down or too volatile. On the other hand, stocks with high betas like Bosch, Eicher Motors, ICICI Bank, and Adani SEZ are not good defensive bets. They are more likely to be played in markets with a lot of action. When the market is bad, defensive stocks are a good way to protect your money. That is the whole point of defensives!