Daily Gains Letter

Defensive Investors Need Some Liquid Courage

By for Daily Gains Letter |

Defensive Investors Need Some Liquid CourageWith the Dow Jones Industrial Average and S&P 500 reaching for the stars, many investors are wondering if they should buy high and sell higher, or look for undervalued stocks that have (they hope) plenty of room to run.

It might seem like an overplayed cliche, but it’s always a good idea to look for stocks that do well regardless of where the economy is headed. When it comes to your retirement portfolio, it’s always a good idea to allocate defensive stocks.

In spite of the stubbornly high unemployment rate, high personal debt levels, and fragile housing market, consumer confidence has been rebounding.

The Conference Board, a New York-based private research group, said recently that its Consumer Confidence Index rose 10% month-over-month to 68.1 in April. While the double-digit gain is a welcome sight, it is still well below the 90 reading that indicates a healthy economy; that level of consumer confidence hasn’t been seen since the Great Recession began in late 2007. (Source: “The Conference Board Consumer Confidence Index Improves in April,” The Conference Board web site, April 30, 2013, last accessed May 14, 2013.)

Still, there is reason for some continued optimism, as The Conference Board noted consumers remain upbeat about the short-term outlook. The percentage of consumers expecting business conditions to improve over the next six months climbed to 16.9% from 15.0%. At the same time, those expecting business conditions to worsen slipped to 15.1% from 17.7%.

With consumer spending accounting for about 70% of U.S. economic activity, it’s easy to see why consumer confidence is such an important short- and long-term indicator.

On the heels of founded and unfounded optimism, it’s not a stretch, as we get closer to the hazy, heady days of summer, that upbeat consumer confidence and optimism will help Americans sustain the economy and spend more. Because when times are good, people drink, and when times are bad, people drink.

During the Great Recession, Americans continued to consume alcohol, and many defensive plays gained ground accordingly. Thanks to increasing consumer confidence and optimism in the U.S. and increasing income in emerging economies like Brazil, Russia, India, and China, people could be drinking beer, wine, and alcohol even more.

This sustained growth should translate into an increase in sales and, hopefully, profitability. As a result, defensive beverage plays can offer investors both capital appreciation and a stable dividend yield.

There are a number of beverage companies that have been performing well since the markets bottomed and continue to have great outlooks.

The purveyor of Jim Beam Bourbon, Makers Mark Bourbon, and Laphroaig Scotch, Beam Inc. (NYSE/BEAM) has a market cap of $10.8 billion, a forward price-to-earnings (P/E) ratio of 22.9, and an annual dividend of 1.3%. In early May, the company announced that first-quarter net income jumped 44% year-over-year to $114.5 million, or $0.71 per share; it also reaffirmed full-year guidance for earnings to grow at a high single-digit percentage rate. The company is currently trading up nine percent year-to-date. (Source: “Beam Reports 2013 First Quarter Results,” Beam Inc. web site, May 2, 2013.)

Beer behemoth Molson Coors Brewing Company (NYSE/TAP) has a market cap of $9.1 billion, a forward P/E of 11.9, and an annual dividend of 2.6%. The company reported a 20.3% increase in first-quarter worldwide beer volume and a 19.8% increase in first-quarter net sales due to the June 2012 acquisition of the company’s new Central Europe operations. (Source: “Molson Coors Reports Higher Net Sales and Lower Underlying After-Tax Income for the First Quarter 2013,” Molson Coors Brewing Company web site, May 7, 2013.)

The alcoholic beverage industry has performed strongly over the last number of years and has been, since the end of prohibition, one of the best defensive sectors to invest in. Barring any unforeseen circumstances, beer, wine, and alcohol stocks should continue to provide investors with solid growth.

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