Are Defensive Stocks Really Safe?

Are Defensive Stocks Really
Safe?
By www.ProfitbleTradingTips.com

http://profitabletradingtips.com/profitable-trading-tips/are-defensive-stocks-really-safe
When expecting a market downturn
many investors flock to so-called
defensive stocks.

But, are defensive stocks really safe?
A swing trader might make a tidy
profit shorting a utility stock when
interest rates go up.

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US news writes that defensive
stocks are not safe anymore.

nervous investors should think twice
before diving into so-called defensive
stocks, especially those securities
with high dividends.

you might end up putting more risk
into your portfolio than you realize.

stocks that have less volatility than
the overall market and pay higher
dividends than most other stocks are
often seen as a way to reduce risk in
a portfolio.

traditionally, these are found in the
defensive sectors, including
consumer staples, utilities and health
care.

There are two issues at play here.
Stocks that pay a good dividend
typically take a hit when rates go up
and the Fed is likely to raise rates this
month.

And, many defensive stocks have
already been bid up by the market.

The advice given by US News is to
look for growth, growth that will
continue even if the market corrects.

Undervalued Is Good

Barron’s suggests low volatility
stocks and undervalued stocks as a
defensive strategy.

[ernesto ramos] achieves this “sleep-
well” portfolio by looking for
undervalued stocks that are
beginning to regain investors’ favor,
while also exhibiting low-risk
properties of stable earnings, strong
balance sheets, and conservative
management.

the fund just passed its third birthday
and received a four-star rating from
morningstar, was no.

1 in its category (“low volatility”) for
2014, and is no. 6 year-to-date.

This is the approach that investors
should take and these are stocks that
traders probably want to avoid.

What to Trade?

A lot of money has flowed into a
handful of stocks in the S&P 500 in
the last year.

The top ten stocks by market cap in
the S&P 500 have gone up 14% in the
last year and all of the rest have fallen
6%.

If you are looking for bargains as well
as defensive stocks don’t look to
Apple or Amazon.

If you are looking for stocks that
might well correct heavily at some
point take a look at Amazon.com
which has a P/E ratio of 900!

Market Watch says there are numbers
that Amazon does not want you
to see.

amazon’s size cuts both ways. as the
law of large numbers teaches us, a
company will find it increasingly
difficult to maintain its growth rate
as it gets bigger.

why should amazon be exempt from
this law?

nejat seyhun, a finance professor at
the university of michigan, says
there’s another factor that amazon’s
investors appear to be overlooking

the vigor with which other retailers
will fight back to keep amazon from
grabbing as much market share as
wall street expects.

a decade ago, of course, many of
those other retailers were ill-
prepared to exploit the potentials of
internet retailing.

the $13.7 billion per year of sales by
which amazon increased its market
share represented the low-lying fruit
on those other retailers’ trees.

The point being that as a company
gets larger growth becomes more
difficult.

But, timing the correction of Amazon
might be difficult so one might
consider put options instead of selling
short.

In any case always do your homework
first before trading.

Are Defensive Stocks Really Safe?

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Are Defensive Stocks Really Safe?