The term defensive usually gives us a negative connotation. In stock market parlance, we call a company a defensive because we will not lose money in that company given its stable business performance. But, recent times have seen the defensives perform admirably. Growth has been outlier. Profit growth has been stellar. A number of the so called defensive companies have been delivering business excellence of a high order. This leads one to think that the investments made in these companies were hardly defensive in nature and only reflect their capability to provide market leadership. The sectors they operate in maybe defensive in nature. But, these companies have risen above their sectors to become market leaders.
Falling stock prices don’t always mean that risks are rising. Irrational investor behavior could create opportunity in every fall.
Value investing works very well when we find companies trading at a significant discount to its intrinsic or fair value. In bull markets, it would be next to impossible to find attractive value propositions. Which is why every bull market sees the value investors selling their ‘over-valued’ stocks and waiting it out when the markets are extremely exuberant. The time to actively hunt for value investing opportunities is when the broader market trades cheap. Another important lead indicator to hunt for value is when the overall economy slows down. When growth is low, profits of companies will not grow fast enough to sustain valuations. This leads to a fall in valuations. When economic growth returns, companies’ profits grow faster. Naturally, their stock prices quickly reflect the changing fortunes.
The bad results will start coming. Time to take stock.