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Your Defensive Playbook


In this nervous market, which I think we are facing, perception is as important as reality.


Over the last couple of months my firm has reshuffled our portfolio to have great exposure in defensive stocks, which I wrote about on the Buzz.

In this nervous market, which I think we are facing, perception is as important as reality. Thus, we have been buying stocks that are perceived to be (and are) high quality companies. I believe having a tilt in one's portfolio towards the medical companies is a good idea for several reasons:

  • The sector has not performed well for a long time - often you can find stocks at attractive valuations.

  • It is one of the few sectors destined to grow for a long time, baby boomers will live longer and will require a high quality of life – will they have the money to pay for it? Well, that is a topic for another article.

  • It has the 'defensive' characteristics needed in this type of market. Though every company is cyclical, it is just a matter of degree. These companies are probably the least cyclical bunch.

Some names that we own in the space are: Becton Dickenson (BDX), Abbot Labs (ABT) and Zimmer Holdings (ZMH). There are plenty of other fish on that side of the pond. Johnson & Johnson (JNJ) comes to mind as a great defensive play. Pfizer (PFE), Merck (MRK) and other drug stocks make the "cheap" list, however, one has to be very careful as they have a very high concentration in just a few blockbuster drugs. Merck's Zocor is coming off patent as I am writing this, and we still don't know the impact it will have on Pfizer's mega blockbuster Lipitor.

Orthopedic stocks like Stryker (SYK) and Biomet (BMET) are hitting attractive relative valuation levels as well, though they are still not cheap on absolute valuation. Zimmer has the most attractive valuation of the orthopedic stocks and I believe its growth rate will be in line (more or less) with the industry. However, we only own a half position in Zimmer because of the possible litigation/regulatory risk on how it compensates the doctors who use its implants. Although this risk is circling around the whole industry, Zimmer is perceived to be the most aggressive company in the space when it comes to its sales practices.

Microsoft (MSFT) comes to mind as another defensive play. Though everybody hates the stock, I view it as an opportunity. If you take out $3 of cash per share, the stock is trading at about 14 times next year earnings – that is cheap!

Wal-Mart (WMT) is another stock that has been on the "hate" list of Wall Street for quite awhile. I have written about it extensively in the past. I believe the downside in the stock is minimal - low 40s or so, where the upside is in the 60s – need I say more?

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Positions in BDX, ZMH, ABT, MSFT, WMT

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