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Lessons From the Market's Defensive All-Stars

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When the markets hit bottom in 2008-2009, these stocks still made money. Let's see what we can learn from them now.

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Consumer staples stocks are classic defensive options for investors because they're based on products people will buy in all types of business conditions. Thus you'll find three grocery giants on the defensive all-star list - Empire (TSE:EMP.A), Metro (TSE:MRU), and Loblaw (TSE:L) - as well as George Weston (TSE:WN), parent of Loblaw.

Consumer discretionary stocks are less conservative because, by definition, they produce things people may decide to cut back on in uncertain times. But some discretionary items are virtually staples because they're affordable. The coffee and food sold by Tim Hortons is an example, and so are the movies shown at Cineplex Galaxy (TSE:CGX) theatres.

Don't make the mistake of thinking that consumer staples stocks are interchangeable in a crisis. Drug store chain Jean Coutu Group (TSE:PJC.A) shares held up quite well in the crash, but competitor Shoppers Drug Mart (TSE:SC) fell sharply.

Health care is another defensive stock market sector, and you'll see a couple of names from this group on the defensive all-star list. Note that Biovail is now Valeant Pharmaceuticals International (NYSE:VRX), while SXC Health Solutions has changed its name to Catamaran (NASDAQ:CTRX).

For a much larger and more established selection of health care stocks, refer to the S&P 500 version of the defensive all-star list. Several other US-listed health care giants also made money in the crash, but they don't appear on the list because they're no longer publicly traded. Two examples are Wyeth and Schering-Plough.

One of the more surprising lessons to be learned from the list of defensive all-stars is that blue-chip dividend stocks - today's stock market darlings - are in no way crash-proof. Sure, we have such blue chippers as Imperial Oil (NYSEAMEX:IMO), Metro, and Empire on the list. But dividend stars in the financial, pipeline, utilities, telecom, and industrial sectors are mostly absent.

This observation is offered not as a dig against dividend stocks, but rather as a reality check for conservative investors who have been using them as an entry back into stocks and even as a substitute for bonds. If you want protection in a down market, look to defensive stocks and bonds. Do not expect more from blue-chip dividend payers than they can reasonably deliver.

A further warning: Do not equate crash-worthiness in a stock with solid longer-term results. Thomson Reuters (NYSE:TRI) weathered the crash in great shape, but today it's about 15% below its price of five years ago.

Editor's Note: This article was written by Rob Carrick, reporter and columnist for The Globe and Mail.

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No positions in stocks mentioned.
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