Richard Moroney, Dow Theory Forecasts newsletter - (NKE) - (XOM) - (GE) - (STR) - (WMT) - (WFC)

Richard Moroney, editor of the Dow Theory Forecasts newsletter, says defensive stocks tend to provide decent returns even during volatile or down markets. Read about some of the characteristics these stocks have in common. Afterward, take a look at a few of the names from this featured expert’s portfolio of Recommended Stocks with Defensive Appeal. Commentary In a recent Monday Night Football game, the Chicago Bears beat the Arizona Cardinals, 24-23, scoring 21 points in the final 16 minutes. What made this improbable comeback especially amazing is how the Bears scored — the defense scored 14 of the 21 points. When it comes to investing, a good defense can also score you points on Wall Street, especially during difficult market periods. “Defensive” stocks tend to provide decent returns even during volatile or down markets. They tend to share common characteristics: Most come from industry groups that see steady demand regardless of economic conditions. Stocks in these groups also tend to exhibit less share price volatility, as measured by standard deviation of returns. The chart below shows average standard deviations for stocks in the 10 sectors of the S&P 1500 Index. Sectors with the lowest standard deviations — consumer staples, financials, and utilities — are typically viewed as “defensive.” Such companies as McDonald’s (MCD) and Nike (NKE) are not part of traditionally defensive sectors, but demand for their products remains fairly solid even during periods of economic weakness. Defensive stocks tend to be large-capitalization companies with steady track records and strong finances. During periods of market uncertainty, investors prefer the safety and stability afforded by larger, more established companies. Defensive stocks tend to have a steady history of sales, earnings, and dividend growth. In market environments when capital gains are scarce, dividends are increasingly attractive. Valuation is a key component of defensive stocks. While such stocks may not be bargain priced, neither are they usually excessively valued. While it may seem odd to play defense with your portfolio with the Dow Industrials reaching all-time highs, recession-resistant blue chips have been among the better performers since cyclical and small-company stocks peaked in May. Whether the rotation toward defensive blue chips continues will hinge on the economy; a slow-growth, disinflationary environment tends to favor blue chips, while strong growth and improving pricing power tend to favor cyclicals and small stocks. Regardless of the economy’s course, it makes sense to sprinkle any portfolio with quality defensive stocks for diversification purposes. Furthermore, defensive stocks provide some portfolio insurance should the economy slow more than Wall Street expects. Most important, several high-quality defensive stocks are available at attractive valuations. Two Recommended Stocks with Defensive Appeal: While many energy stocks have been hurt by lower commodity prices, shares of Exxon Mobil (XOM) have held up well. Because of its enormous size and diversity, investors view the company as a safer energy bet that delivers steadier results than its peers. Ventures with state-owned oil companies are promising, and international development projects in West Africa, the Middle East, and Russia should boost production in the years ahead. On Oct. 23, Exxon said it reached a preliminary agreement to sell natural gas from Russia’s Sakhalin Island to China. Deepwater exploration also represents a strong growth opportunity, and the company is expanding its presence in the growing market for liquefied natural gas. Exxon has added enough reserves to offset at least 100% of production every year since 1997 — a trend likely to continue. Capital spending is expected to average about $20 billion per year from 2006 to 2010, up from $17.7 billion last year. Exxon aggressively repurchases its own shares. The company repurchased $12.8 billion in stock in the first half of 2006 and expects to buy back $7 billion in the September quarter. While General Electric (GE) is classified as an industrial conglomerate, its business mix is so diversified that its performance is not especially dependent on the economic cycle. GE makes products ranging from jet engines to consumer appliances to medical equipment, many of which follow different business cycles. The company is one of the world’s largest providers of commercial and consumer financing and owns the NBC television network and Universal Studios. Recent results have benefited from strength in a variety of end markets, a trend management expects to continue into 2007. Operating losses at NBC Universal have weighed on GE’s earnings growth in recent quarters, but the unit expects to return to profitability in the December quarter. In October, NBC Universal announced plans to cut 700 jobs, or 5% of its work force, and cut annual costs by $750 million by the end of 2008. GE plans to invest the savings in fast-growing international and digital operations. Other Recommended Stocks with Defensive Appeal include: Questar (STR) is a diversified energy services holding company. It has two basic divisions--Market Resources and Regulated Services. Market Resources engages in energy development and production; gas gathering and processing; and wholesale gas, electricity and hydrocarbon liquids marketing and trading. Regulated Services conducts interstate gas transmission and storage activities and retail gas distribution services. The Company is also involved in information and communication systems and technologies. Wal-Mart Stores (WMT) is the world's largest retailer. They are engaged in the operation of mass merchandising stores, which serve their customers primarily through the operation of three segments, which are the Wal-Mart Stores segment, the SAM'S Club segment and the International segment. Wells Fargo (WFC) is a diversified financial services company providing banking, insurance, investments, mortgage and consumer finance services through stores, its Internet site and other distribution channels across North America as well as internationally. This article highlights the commentary of Richard Moroney for the Zacks.com audience. Richard Moroney provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "Dow Theory Forecasts" newsletter. Try it free for 30 days and see if you can improve your investment performance. Learn more about "Dow Theory Forecasts" and 30-Day Free Trial. And get immediate access to current issues and special reports. Click here now. 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