For several months, the market has seemed to be on unsure footing, going up and going down, with no clear commitment on where it wants to go. At times like this, it makes sense to play safe.
One good safety strategy is to buy on the cheap. If a stock is fairly cheap, it does not have much room to fall, especially when compared with more expensive investments. This, in fact, is the thinking behind part of Benjamin Graham's strategy, in which he limited the price-to-earnings multiple to no more than 15. Stocks with moderate P/E multiples are defensive by nature, he believed. Graham, if you don't know, was the father of stock market value investing.
To find defensive stocks, I screened for shares with P/E multiples of no less than five and no more than 10. To choose stocks, I rely on a number of strategies I computerized, which are based on the way some of Wall Street's most successful investors invest. One of these is based on the writings of Martin Zweig, who set a floor of five for the P/E multiple. He would not go below it because he believed companies with too low a P/E multiple were mainly weak companies. That sounds like good advice to me. I chose 10 as the top end of my range because this is well below the markets' current average P/E, which is 16, and therefore represents a sizable discount from the norm. Put another way, based on the P/E multiple, these are cheap stocks.
PartnerRe (PRE) is a reinsurance company (it provides multi-line reinsurance to insurance companies) that operates in the U.S., and several other countries, including the Netherlands, China, Canada, U.K., Mexico, Switzerland, Brazil and France. One of my strategies is based on the thinking of Peter Lynch, the great mutual fund manager. This strategy stresses the P/E/G ratio, which is the P/E relative to growth and is a measure of how much the investor is paying for growth. PartnerRe's P/E is 5.18 and growth rate is 35.26%, based on the average of the three, four and five year historical EPS growth rates. This produces a very favorable P/E/G of 0.15 (up to 1.0 is acceptable). In addition, the company's return on assets is a robust 5.12%; the strategy looks for a minimum of 1% ROA when dealing with financial companies such as PartnerRe.
Rolls-Royce (RYCEY) is not in the car business (Rolls-Royce automobiles are a product of Germany's BMW). Rolls-Royce is a major maker of jet engines, among other products. Like PartnerRe, it is a Lynch strategy favorite. Its P/E is 8.0 and its yield-adjusted P/E/G is a solid 0.51. For an industrial company such as Rolls-Royce, the strategy looks at the debt-equity ratio. Rolls-Royce's is about 1:2, which is perfectly acceptable.
Brunswick (BC) makes such recreational products as boats, bowling alleys and billiards tables. James P. O'Shaughnessy is an important investment theorist and mutual fund manager, and the strategy I based on his writings gives Brunswick a high rating. It likes the company's market cap ($4.0 billion), earnings per share (EPS) that have increased in each of the past five years, and a price-to-sales ratio of 1.02 (1.5 is the maximum allowed). Those companies that pass these three tests are then judged by their relative strength (a measure of how well a stock has performed in the past year vs. the market). The top 50 companies based on their relative strength are then given the strategy's highest rating. Brunswick's relative strength of 64 puts it in this top-50 cohort.