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Defensive Stocks Are Getting Way Too Cheap

Everybody has been overly bullish following Donald Trump’s presidential victory. As a result, investors have moved out of defensive stocks and into cyclical names. Sure, you’ll get more upside if you hold cyclical names during a bull run, but if the markets suddenly turn on you, you could be in store for more downside.

Warren Buffett has been buying a ton of stock since the Trump election, and even bearish investor Prem Watsa suddenly turned bullish. Is the Trump rally going much higher from here? It definitely could. President Trump is a pro-business guy, and his administration’s corporate tax cut and deregulatory measures will provide stocks with American exposure and a huge bump in earnings.

The Trump Rally could still have a way to go; I think Trump is a catalyst that could send the markets up from here. But keep in mind we’re in the very late stages of an old bull market, and greed could quickly turn into fear, as we saw over the past few weeks. You shouldn’t get rid of your defensive names because you’re bullish on the market as a whole because by the time the markets turn on you, it’ll probably be too late to get that defensive coverage you wanted.

The herd is already dumping their defensive positions, but why should you follow? If you’re a contrarian investor, then you should actually be buying shares of defensive companies because they’re on sale, and you can bet they’ll go back up once the average investor starts getting fearful again.

Don’t follow the herd. Don’t time the market. Think long term and be contrarian.

Loblaw Companies Limited (TSX:L) is a terrific example of a great company that is on sale because it’s a defensive name. The stock has been hovering around the $70 mark for almost two years now, but the company is delivering outstanding results, despite lower food prices.

Loblaw has a huge moat in place and will be the perfect place to hide once the Trump Rally loses steam. As Canada’s largest grocer, there’s usually a supermarket close to the average Canadian. It would take a competitor a lot of capital to get a such an impressive amount of coverage, and I don’t think anyone would be dying to get into the grocery space either with such low margins.

The management team, led by Galen G. Weston, is top-notch. The company’s operational efficiency is improving, and it’s a huge reason why the company is raking in profits with paper-thin margins.

Although the stock has slowed down, the business certainly has not. If you’re a contrarian investor looking to prepare for a rainy day, then now is the time to pick up shares of defensive names like Loblaw.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of Loblaw Companies Limited.

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