In the ever-evolving landscape of investing, the concept of defensive stocks has undergone a significant transformation. Once a reliable strategy, the traditional defensive sectors like staples, utilities, telecoms, and pharma now account for only about 10% of the S&P 500, a stark contrast to their 30% share 25 years ago. This shift has left many investors questioning the effectiveness of the old playbook. Enter Adam Parker, founder of Trivariate Research and former Chief US Equity Strategist at Morgan Stanley, who is on a mission to redefine defensive investing. Parker argues that the traditional defensive sectors have become less reliable, and he's on a quest to uncover the new guard of defensive stocks. His approach is a refreshing departure from the sector-based approach of the past. Instead, Parker focuses on stocks that have demonstrated resilience during market downturns, emphasizing a multi-faceted strategy. He starts by identifying stocks with positive earnings revisions over the past six months, ensuring they have the potential to adapt and grow. Then, he layers in low beta, which has proven its mettle in real market downturns, narrow analyst dispersion, positive forecasted earnings growth, and reasonable valuations. Consistent dividend growth is also a key consideration. Parker's meticulous selection process aims to find stocks that truly protect capital when the market takes a downturn, rather than those that merely appear defensive on paper. Among the stocks he highlights are:
- UnitedHealth (UNH): The largest health insurer in America, UnitedHealth boasts massive pricing power, with Parker expecting annual price increases of 7-9%. This pricing power is a key differentiator, making it a defensive stock in a volatile market.
- Microsoft (MSFT): While not traditionally considered a defensive stock, Microsoft's deep integration into business operations, from Outlook to LinkedIn, makes it a sticky asset. Parker believes its stickiness will ensure stable earnings, even in a downturn.
- Visa (V): Along with Mastercard, Visa is a reliable compounder, having held up through multiple market cycles. Its global payments network is a solid hedge against market volatility.
- Eli Lilly (LLY): Parker sees a bright future for Eli Lilly's GLP-1 drugs, which are becoming more accessible and effective over time. With a large portion of the American population overweight or obese, the company is poised for long-term growth.
- AbbVie (ABBV): A diversified pharma giant, AbbVie offers a mix of Humira, a strong immunology franchise, growing oncology, and consumer products like Botox. Its broad healthcare exposure and lack of AI or semiconductor exposure make it a defensive pick.
- Abbott Laboratories (ABT): Abbott's focus on medical devices, diagnostics, nutrition, and cardiovascular products complements the traditional pharma names. Its diverse healthcare exposure and different operating profile make it a well-rounded defensive stock.
- Mondelez (MDLZ): The snack giant behind iconic brands like Oreo and Toblerone, Mondelez is a strong consumer staples play. Parker sees potential for above-GDP growth and margin expansion, making it a defensive investment with a hedge against the GLP-1 trend.
Parker's approach is a testament to the evolving nature of defensive investing. He's not advocating for a complete abandonment of the defensive strategy but rather a redefinition of what it means to be defensive in today's market. By focusing on stocks with positive earnings revisions, low beta, and a diverse set of strengths, Parker is helping investors navigate the new defensive landscape. As the market continues to evolve, Parker's insights offer a fresh perspective on how to build a robust defensive portfolio, ensuring investors can weather the storms of market volatility.
