Sunday, June 17

Week 50 - Lifeboat Stocks Revisited

Situation: If you invest in stocks, you’d like some protection from serious losses during a bear market. Such “defensive” stocks are those issued by companies in 3 key industries: health care, consumer staples and regulated electric utilities. We call the highest quality companies in these 3 areas Lifeboat Stocks. This week's blog takes into consideration the “safety” of these stocks by comparing the Finance Value (reward minus risk) of Lifeboat Stocks in the S&P 500 Index with competing investments. We selected 2 inflation-protected bond funds and the 2 stock/bond mutual funds that best served investors during the 2007-09 bear market. Our benchmark is the lowest-cost S&P 500 Index fund (see the attached Table), since the "promise" of Lifeboat Stocks is to almost keep up with the performance of the S&P 500 Index during a bull market but do much better in a bear market.

Of the 14 Lifeboat Stocks in our Master List (Week 39), 6 kept the “promise” (SO, NEE, WEC, MKC, HRL and ABT). WMT, JNJ, SYY and MDT had 10 yr returns that fell somewhat behind the S&P 500 fund. In terms of Finance Value, however, WMT and JNJ did quite well because losses to the investor during the bear market were either modest (JNJ) or were actually a surprising gain (WMT). Returns for PG, PEP, BDX and KO during the bear market were disappointing, although much less disappointing than those for the S&P 500 Index. Here at ITR, “disappointing” means that losses exceed the standard definition of a bear market (i.e., more than 20%). After all, the principle behind owning a Lifeboat Stock is that you’ll be shielded from such a loss.

Bottom Line: No stock has a chance to make you feel “safe” during a bear market unless it is issued by a company that feeds people (WMT, HRL, MKC, SYY), sells essential health care products (JNJ, ABT, BDX, MDT), or provides electricity (SO, NEE, WEC). Companies that sell soda pop, snacks, and laundry detergent (KO, PEP, PG) will do all right compared to the S&P 500 Index but still disappoint. Our retrospective analysis of returns and risks for Lifeboat Stocks shows that only 6 of the 14 rewarded investors well over the past 10 yrs without scaring them half to death during the bear market. Those 6 are: ABT, SO, NEE, WEC, MKC and HRL. Three were standout performers on all counts: Wisconsin Energy (WEC), NextEra Energy (NEE), and Abbott Laboratories (ABT). Neither of the top-performing mutual funds during the 2007-2009 bear market did well by our criteria. MDLOX lost more than 20% during the bear market even though it beat the S&P 500 Index over 10 yrs, while VWINX provided good protection during the bear market but barely beat the S&P 500.

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