Review of Defensive Investing

 | Jul 27, 2012 | 9:00 AM EDT
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Last October I wrote about defensive investing strategies and highlighted the grocery stores Safeway (SWY), Kroger (KR) and Wal-Mart Stores (WMT), along with the hotel/motel chains Intercontinental Hotels Group (IHG) and Choice Hotels International (CHH). 

I last updated and commented on these issues in January, so it's time for a review.

In short, since January SWY has lost 28% and has been on a steady trend down since February, KR is off by 11% with a similar pattern. WMT, on the other hand, increased 23% with a steadily rising value all year long. 

This is a bit of a conundrum for me and I'll come back to it momentarily. We still own all three as well. 

CHH and IHG are also exhibiting non-similar patterns and that was not what I was expecting for this year. CHH is essentially sideways, while IHG is up 34%.

Chalk one up for diversification on both counts, at least. I still like all five stocks, but I want to focus on SWY and KR here. 

They're losing customers to discounters WMT and Costco Wholesale (COST), as well as to the high-end grocery chains The Fresh Market (TFM) and Whole Foods Market (WFM).

I anticipated challenges by the discounters, but didn't think the migration of wealthier and increasingly health conscious consumers to the higher-end stores would prove to be an issue for the traditional grocery stores chains to have to deal with until after the economy had rebounded. 

Because of the low dividend on WFM and no dividend on TFM, they were never considered as part of our defensive strategy.

The dividends of 2.2% for KR, 4.6% for SWY and 2.2% for WMT are secure and SWY and KR stock should start to benefit from the search for income by investors and the increase in preparing meals at home vs. going to restaurants, which is a classic response to recessions. 

And, as I've reiterated many times this year already, I believe the U.S. is either heading into or may be in recession already.

The 1.9% dividend of CHH and 3.2% dividend on IHG should be secure and should also benefit from a slowdown in economic activity.

Lastly, the original column concerning defensive investing was a follow up to a column from February 2011 and I would suggest reading it again in preparation for what may happen within certain sectors of the economy and stock market as economic activity continues to slow. 

Many sectors of the equity markets have been pricing this year for increased economic activity, even as sovereign bond yields have continued to decline, sending the opposite signal. 

If the trend toward slowing economic activity continues, equity investors will eventually move to a defensive position and seek large companies in the consumer staples sectors with high dividends.

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