The Motley Fool

2 Key Ways to Shop for a Defensive Stock in a Turbulent Market

A confluence of market stressors is turning investors toward defensive stocks at the moment. With trade tensions, low precious metals prices, low oil prices, and a rising cost of living, the climate on the investment front is one of looming uncertainty. Indeed, the final week of May showed just how widespread an infection of fear can spread in the TSX, and how quickly. So just how does one spot a defensive stock right now?

Find a “Goldilocks” bank

Having witnessed the market bloodbath that was the final week of May, it might not behoove an investor seeking defensiveness in financials to put too much faith in any single Canadian banking stock at the moment. Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) is arguably the least geographically diversified bank, arguably making for a pick for stalwart domestic economy bulls only.

Then we have Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), which has the opposite problem (or benefit, depending on one’s stance), of being the most exposed to foreign markets. Relatively unchanged at the time of writing, investors can now go back to debating whether or not Scotiabank’s dividend yield of 4.84% overrides negative returns over the last 12 months to make for a rewarding stock.

The issue here is that while some Canadian banks are too exposed to the domestic market, others are too exposed to international ones. An individual investor is then forced to choose which type of overexposure is the best (or worst, as the case may be). The trick, then is to find something in the middle – in other words, a diversified “Goldilocks” bank that mixes domestic and international exposure in more or less equal measure.

Separate the nice-to-haves from the must-haves

High cost items will likely be among the first to suffer should Canada find itself in a recession; however, with so much uncertainty in the markets, the threat of a downturn is almost as bad as the real thing.

That’s why, with rising overheads and a plunging share price, luxury retail stocks like Canada Goose (TSX:GOOS)(NYSE:GOOS) could find themselves in a bad position. With retail suffering in general as the populace tightens its belts, high-cost luxury items such as the cold weather apparel produced and sold by Canada Goose may find itself going out of fashion if adverse economic conditions should persist.

Now contrast this with something like Park Lawn (TSX:PLC). Having recently climbed past its record-setting price to hit a 52-week high, the funerary and memorial service provider occupies a solid niche in the market, representing one of the most secure industries out there. If investors want a stock that can weather a recession, it’s hard to think of a better choice for the cautious dividend portfolio owner.

The bottom line

Having shed a significant amount over the last couple of weeks of trading, Scotiabank’s bleeding is starting to slow – but the banker’s still not a buy. CIBC is perhaps overly exposed to a domestic market downturn, and as such might prove a risky play in the current economic climate. Investors wishing to get more defensive could consider clean energy stocks, gold, and proven consumer staples.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.