Back in the 1972 NFL season, one team achieved what has never been repeated: a perfect, 17-0 season. Of course I’m talking about my Miami Dolphins.
Should you think that perfection was due entirely to an offense led by Bob Griese and Earl Morrall, well, you’d be wrong. A big part of that season run was the defense, nicknamed the “no-name defense” by the head coach of the Dallas Cowboys.
In case you’ve forgotten or you weren’t around, the ‘Fins had three shutouts that year, and the most points allowed in a single game was 24. In Super Bowl VII, the Dolphins held the Washington Redskins to just 7 points. Defense makes that happen.
It has been said that the best offense is a good defense, and that defense wins championships. In my experience that’s true not only in sports, but also in the stock market.
With the stock market undergoing its first correction of 2024, as I pointed out in my last column, investors are understandably on edge.
Since 1950 the average market correction has been 13.7%. And the S&P 500 dropped about 8% at Monday morning’s low.
So, in addition to having stops in place on your stocks to help safeguard your open gains, there are other defensive measures you can also take right now, just in case stocks slip lower.
Defensive stocks and sectors are the place to be right now for investors worried about a steeper market decline. In fact, defensive stocks have been among the best-performing assets since the market began turning volatile in mid-July.
In the graph above you can see that the strongest S&P 500 sectors since mid-July have been defensive, according to Bespoke Investment Group. Real estate is the only exception, since it’s considered cyclical. But it’s also interest-rate sensitive, which got a boost after the Federal Reserve indicated rate cuts are coming.
The other top-performing sectors are Health Care, Consumer Staples, and Utilities – all considered highly defensive stocks. And they’re a good place to stash your cash when markets turn volatile.
Among the individual defensive stock leaders are:
- Kellanova (K), the snack-food spinoff from Kellogg’s (think Eggo waffles, Pringles, and Cheez-It crackers), with its stock up 26.5% since July 16.
- Universal Health Services (UHS), a leading health care facilities manager, with shares up 16%.
- And pharma-giant Bristol-Meyers Squibb (BMY), up 15.7%.
What they all have in common is defensive businesses that are somewhat insulated from the ups and downs in the economy and markets. They also have something else in common: dividends. BMY, for instance, pays a generous annual dividend yield over 5%.
These are the kinds of stocks that investors flock to when the stock market corrects and volatility spikes.
As you can see above, defensive sectors including Staples, Utilities, and Health Care outperformed the S&P 500 after the tech-wreck in 2000. While I don’t believe tech is in a bubble that’s about to burst, there are some similarities.
The Magnificent 7 stocks have been leading the market higher the past several years. As a result, their stock valuations have expanded considerably. Meanwhile, defensive sectors are undervalued.
So, it makes perfect sense that investors may be looking to rotate out of the most overvalued stocks and into cheaper sectors that pay healthy dividends.
With that in mind, now is a good time to revisit my defensive stock screener to see what’s rising to the top of the list in terms of recent performance.
Specifically, I want to screen for the healthiest, highest-quality stocks in the Staples, Health Care, and Utilities sectors.
And with the help of a few simple TradeSmith Screener filters outlined below, you can do this quickly and easily.
Our Screener tool is available to our Ideas by TradeSmith Premium-level subscribers and higher, as well as Trade360, TradeSmith Essentials, and TradeSmith Platinum. To include the Business Quality Score, you’ll also need to be subscribed to Ratings by TradeSmith and TradeStops Pro or Elite.
As a reminder, I have a Platinum account, so you may see features here that are not available to you. Call 888-623-0858 to discuss.
Be sure you are logged in to the TradeSmith Finance platform. Now, click on + Create new screener to get started.
Let’s quickly cover the specific filters to add and why.
To get started, click on + Manage Filters and add the following:
Health Status: Green Zone – only the healthiest stocks.
Sectors: Consumer Staples, Health Care, Utilities – focus only on the defensive sectors that are leading the stock market.
Market Capitalization: Mega Cap and Large Cap, plus Mid Cap for good measure – bigger is better in volatile markets because these stocks are more stable.
One Week Change: 0% – stocks have taken a beating over the past week, so I want stocks that have held up better than the rest of the market.
Free Cash Flow: A minimum of $100 million in free cash flow – as I have pointed out previously, cash is KING when markets are turbulent.
Business Quality Score: More than 50 – this comprehensive TradeSmith formula (available to Ratings by TradeSmith subscribers) ranks all stocks on their quality based on various metrics – including growth, valuation, safety, and payout. I set this filter to get roughly the top half of stocks we rank by quality.
Display & Sort Results: I sorted my results by Business Quality Score and “DESC” (descending) – to get the highest-quality stocks at the top of the list.
This screen gave me 32 stocks.
That’s way too many to post here. But that’s OK – I’ll get you started with my Top 12, and you can easily recreate this screen to find more defensive quality stocks.
The finalists are a “Who’s Who” list of some of America’s biggest – and best-known – blue-chips. This includes Colgate-Palmolive (CL), Procter & Gamble (PG), and Coca-Cola (KO), just to name a few. Most pay healthy dividends, too, which is another key defensive factor to look for with so much uncertainty today.
Notice too that each member of this list exhibits incredibly strong Business Quality. The entire top 12 list has a BQS in the 90s. That’s roughly the Top 10% of stocks we rank for quality.
The rest of the stocks on this list mostly have a BQS in the 80s and 70s. Only one utility stock made the cut, American Electric Power (AEP), with a BQS of 81.
Mike Burnick’s Bottom Line: When markets turn volatile and the near-term outlook is a bit uncertain, that’s the time to play good defense, just like the 1972 Dolphins, with your stock portfolio. And our TradeSmith Screener tools can quickly and easily help you play strong defense – uncovering the best, highest-quality stocks in defensive sectors.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. Today I used our Screener tool to find defensive stocks. But TradeStops, our risk management software, is what will help you know when to buy in, how much to buy, and when to exit your positions. Built around our proprietary Volatility Quotient, TradeStops is a great complement to Ideas by TradeSmith so you get the perfect blend of playing offense and defense.
Our TradeStops Pro subscription also includes access to Pure Quant, a revolutionary portfolio builder, and the Billionaires Club, a view into the recent purchases of elite investors: a group of 27 billionaires. Learn more right here.