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Three Defensive Sectors To Buy Right Now

 May 31, 2012 10:06 AM
 


(By Louis Basenese) Since its April peak, the S&P 500 Index is off 6.5%. What gives?

Well, investors are concerned that the global economy might be slowing, concerned that the European debt crisis might be worsening and they're concerned we might be overdue for a nasty correction.

That's a lot of "might be's." And it's usually not a good idea to base investment decisions on hunches about the future.

Plus, as I revealed last week, sentiment actually supports being bullish right now.

[Related -Gold hasn’t lost its allure in my portfolio]

Simply telling you to be bullish on stocks isn't extremely helpful, though, now is it? It'd be much more helpful if I actually provided specific recommendations.

With that in mind, here are three sectors – and three stocks – that appear particularly attractive right now…

A Good Defense is the Best Offense

What we're witnessing is a textbook selloff.

Economically sensitive sectors are getting hammered the most. Like energy, materials and industrials.

Meanwhile, traditionally defensive sectors are weathering the storm intact. Like utilities, healthcare and consumer staples.

Utilities stocks are actually defying the broad market selloff and logging gains since the end of the first quarter. If we include dividend payments, the outperformance of utilities stocks would be even more pronounced.

[Related -Is The S&P 500 Triple Top Actually A Bullish Sign?]

The investing implications couldn't be more straightforward. In the current market, good defense is the best offense.

That means avoiding cyclical exchange traded funds (ETFs) like the Industrials Select SPDR (NYSE: XLI), the Energy Select SPDR (NYSE: XLE) and the Materials Select SPDR (NYSE: XLB).

And instead, opting for defensive ETFs like the Consumer Staples Select Sector SPDR (NYSE: XLP), the Utilities Select Sector SPDR (NYSE: XLU) and the Health Care Select Sector SPDR (NYSE: XLV).

Or better yet, we should hunt for undervalued names in each defensive sector that are raising dividends, which is a clear sign of fundamental strength.

Here are three stocks that fit the bill for you to consider:

Healthcare: Johnson & Johnson (NYSE: JNJ)

Johnson & Johnson is the world's largest and most diverse healthcare company. As a result, it ranks as probably the most defensive healthcare stock.

Shares are attractively priced, trading at a forward price-to-earnings (P/E) ratio of just 11.5, compared to 13.6 for the S&P 500 Index.

The stock also sports a solid 3.9% yield, after management raised the dividend for the fiftieth consecutive year in April.

And its dividend payout ratio, which is one of my seven criteria for finding the safest high-yield investments, of just 62% provides all the reassurance that the dividend is safe.

Utilities: Consolidated Edison (NYSE: ED)

Founded in 1884, Consolidated Edison is one of the oldest utilities. It provides steam, natural gas and electricity in one of the most densely populated markets in the country – the northeast. The result? There's virtually no risk that the company's going out of business.

Shares aren't a screaming bargain at a forward P/E ratio of 15.6. But such a valuation is hardly considered expensive.

What is compelling about Consolidated Edison is its 4.1% dividend yield. That's almost double the 2.1% dividend yield of the S&P 500 Index.

Rest assured, the dividend is safe, as the company's dividend payout ratio checks-in at a conservative 70%. And it's all but guaranteed to increase, too. For 38 years in a row (and counting) management has increased the dividend.

Consumer Staples: Kimberly Clark (NYSE: KMB)

No matter what's happening in the world, consumers don't stop buying goods like paper towels, toilet paper and diapers. Such steady demand translates into steady results for consumer staples juggernaut, Kimberly Clark.

The stock currently trades at a forward P/E ratio of just 14.4, roughly in line with the market. But its dividend yield is almost double. (After raising the dividend for the fortieth consecutive year in February, Kimberly Clark currently yields 3.7%, compared to 2.1% for the S&P 500 Index.)

And like Consolidated Edison and Johnson & Johnson, Kimberly Clark's dividend is safe, based on its dividend payout ratio of just 66%.

Bottom line: Just because the broad market is selling off doesn't mean all sectors and stocks are sinking. Healthcare, utilities and consumer staples are three defensive sectors that are providing, and should continue to provide, good offense (i.e. profits) for investors. Invest accordingly.

Ahead of the tape,

Louis Basenese

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