Defensive Stocks When Stocks Are Overvalued
By Floyd Saunders, The Author of Five Paths To Wealth, Family Financial Freedom
You may have notice that many investors like Warren Buffett are setting on huge piles of cash, waiting for the next market crash and then they will jump in and start buying the best companies at huge discounts.
They are of course missing one of the longest running bull markets in history. Stocks by any measure (most commonly the price earnings ratio) are overvalued.
The price-to-earnings ratio (or P/E ratio) tells investors what the market is willing to pay at a given moment for a stock based on its past or projected future earnings. The current S&P500 10-year P/E Ratio is 37.5. This is 89% above the modern-era market average of 19.6.
Historically, a P/E ratio of 19 is considered to be about average. So stocks with a P/E below 19 are cheap. Those with a higher P/E are expensive. The P/E ratio also varies by industry, so be sure and check that for any stock you might be interested in adding to your holdings.
Stock market typically run in cycles with rising prices called a bull market. A bear market is when great companies see share prices falling, until they reach fair value or less. This is when value investors start to buy up shares, because they know they are buying at a discount.
There is a way to protect your investment from the risk of a market correction, simply buy more defensive stocks. These stocks are companies that offer products that consumers will buy regardless of the state of the economy. These stocks tend to underperform during strong bull markets. Conversely, they tend to outperform the market during corrections.
I have identified six defensive stocks that you can buy to give your portfolio a hedge against an uncertain market. It’s never a bad time to start protecting the gains you’ve made. Remember, I provide this information for educational purposes only, always do your own research and/or talk with an investment professional.
Floyd Saunders has more than 35 years of experience in the financial services industry. Floyd’s diverse background includes experience in retail banking, investment banking, insurance, investments, annuities, financial planning, and tax preparation. He has authored the following books: Figuring Out Wall Street, Family Financial Freedom and Five Paths To Wealth.
He has been an adjunct faculty member for Baker University, St. Mary’s College, Moraga, California, and Community Colleges in California, teaching courses in personal money management, managerial finance, money and banking, and principles of banking.
He has worked for Bank of America, JP Morgan and JPMorgan Chase, TransAmerica, Wells Fargo, Citibank, WoltersKluwer/CCH, H.R. Block and as a consultant in the financial services industry. He has prior experience as a registered representative and has published several articles on personal financial planning, investing and personal money management. Learn more at floydsaunders.com