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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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Hockey fan or not, you'll appreciate the defense played by Tim Hortons (NYSE:THI).

Over the six months when the stock markets hit rock bottom in 2008-2009, just 41 of the 245 or so stocks in the S&P/TSX Composite Index (TSE:OSPTX) came through without losing money.

Tim Hortons, the doughnut chain named after a standout Toronto Maple Leafs defenseman, was in that group. Its 5.1% gain put it in the select company of more than a dozen gold miners, some tech companies, and a few - fewer than you might think - other blue-chip dividend stocks.

Let's get to know this group of stocks - the defensive all-star team - and see what we can learn from them about preparing for future stock-market upsets.

Screening for this exercise was performed by senior consultant Craig McGee of Morningstar Canada. He simply looked for stocks on all the major North American indexes that made money from the beginning of October 2008 through the end of March 2009.

The stock markets peaked in spring of 2008, weakened, and then started to plunge in early September. But it's the six months spanning the fourth quarter of 2008 and first quarter of 2009 that take us through to the nadir of the market crisis.

Blood and gore were everywhere during that period. The S&P/TSX Composite Index fell 24.3%, and that's with dividends included. The S&P 500 (INDEXSP:.INX) fell 30.5%, and the Dow Jones Industrial Average (INDEXDJX:.DJI) fell 28.6%.

All of these indexes rallied in 2009 and 2010, and after a pause in 2011, they gained ground again last year. Yet my sense in listening to individual investors is that some are still struggling to make back what they lost in the crash.

The sheer number of gold mining stocks on our all-star defensive roster suggests there is some benefit to having exposure to gold in chaotic times. The price of gold bullion rose about 4.5% from October 2008 through March 2009, so an exchange-traded fund tracking gold prices would have delivered some benefit. But gold miners, both large and small, did equally well or better.

Can't pick one gold stock from another? Then consider an ETF such as the iShares S&P/TSX Global Gold Index Fund (TSE:XGD), which holds Canadian and global gold producers. It was up nicely during the six months we're looking at here.

Before we proceed, you have to get something straight about the defensive all-stars. On a point-A-to-point-B basis, they made money through the worst of the stock market crash. But the volatility in between was fierce in many cases.

Take Barrick Gold (NYSE:ABX) as an example. It made 5.4% from October 1, 2008 through March 31, 2009, which was exemplary. But a closer look shows the stock was around $35 at the end of September, down to $26 in October, and then back above $37 at the end of March.

Even Tim Hortons took some hits during that stretch. It started near $30 and fell to almost $27 before popping back up to about $33 at the end of the first quarter of 2009. The defensive all-stars survived, but no one can say they were unscathed.

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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