As the U.S. stock market continues to hit new highs with remarkable frequency, the allure of jumping in with a lump sum investment can be tempting. However, the current market highs might also leave you feeling cautious and wary of the potential for a downturn right after you invest your hard-earned money.
Despite these concerns, opting to sit on the sidelines and hold your investments in cash isn’t a viable long-term strategy either. Over time, inflation erodes the purchasing power of cash, gradually diminishing the value of your savings.
The solution? You can still participate in the market while adopting a more conservative approach through a defensive portfolio. Today, we’re highlighting three defensive TSX stock picks that are tailored for lower-risk investors. Let’s dive into what makes these stocks defensive.
What makes a stock defensive?
In my opinion, a stock earns its “defensive” label primarily through two distinct traits, each playing a crucial role in its ability to provide stability and protection to an investor’s portfolio during various market conditions.
The first trait is the stock’s association with a durable sector that provides essential products and services. This includes sectors such as consumer staples, which cover necessities like food, beverages, and household goods, as well as utilities providing water, gas, and electricity.
The defensive nature of these sectors stems from their products and services being in constant demand, regardless of economic cycles. While other sectors may experience significant fluctuations in demand based on economic conditions, consumer staples and utilities tend to see steady demand.
The second defining trait of a defensive stock is its beta, a measure of the stock’s volatility in relation to the overall market. Defensive stocks typically have a beta of less than one, indicating that they are less volatile than the market.
In practical terms, this means that during periods of market downturn, defensive stocks are likely to experience less severe price declines compared to the broader market. Conversely, in a rising market, they might not see gains as significant as more aggressive, higher-beta stocks.
My three defensive stock picks
My current top picks for Canadian defensive stocks include Dollarama (TSX:DOL), Fortis (TSX:FTS), and Loblaw (TSX:L). Each of these stocks comes from sectors known for their resilience and stability, making them well-suited for investors looking to adopt a defensive strategy.
Dollarama operates within the consumer discretionary sector but in the most stable and resilient segment of discount retail. The nature of its business model, focusing on low-cost goods, means that during tough economic times, people may turn to Dollarama for their basic needs, ensuring steady demand for its products.
Fortis falls under the utilities sector, a quintessential example of defensive investing. Utilities are essential services — electricity, gas, and water — that people need regardless of economic conditions. The demand for these services remains relatively constant, providing companies like Fortis with stable revenue streams even when the economy faces challenges.
Loblaw operates in the consumer staples sector, selling essential items such as food and household products. No matter the state of the economy, people still need to eat and maintain their homes, which supports consistent demand for Loblaw’s offerings. This sector’s inherent stability is a significant factor in its defensive characteristics.
The beta values of these stocks further underscore their defensive nature. Dollarama has a beta of 0.57, Fortis is even lower at 0.18, and Loblaw has the lowest beta at 0.1. In practical terms, if the S&P/TSX 60 Index moves by 1%, these stocks can be expected to move significantly less, with Dollarama potentially moving about 0.57%, Fortis around 0.18%, and Loblaw just 0.1% in the same direction.
