Defensive Food for Thought

05/27/2005 12:00 am EST


Ivan Martchev

Editor, Vital Resource Investor and Global Viewpoints

Ivan Martchev is a member of the prestigious KCI Communications editorial team, providing global and domestic stock, bond, and fund expertise. Here, he shares his decidedly cautious outlook and his favorite bets for defensive investors.

"The stock market is obsessed with what the central bank is doing. They are worried that the Fed will overshoot. Why? In every major prior tightening cycle, we have had some sort of a blowout occur due to overshooting. For example, in 1987, we had a crash. In 1994, we had Orange County. In 2000, we had the NASDAQ bubble pop. So this time, nobody is really sure what will happen, but people are afraid. Greenspan’s track record has been one of overshooting when it comes to monetary policy, on both sides, whether he is tightening or loosening.

"From the institutions are doing, and the way the stock market is acting, it looks to me like there is more downside in the stock market over the summer. My best guess at this moment is that the market will likely see last year’s low at some point over the summer, which is about 1750 on the NASDAQ and about 1060 on the S&P. The Dow is most likely going to make a new low for the year. It has been notably underperforming the other indices. Those who own aggressive stocks, should look to build larger cash positions and add more high quality bond exposure. I’d caution, however, that high yield bonds and emerging market bonds are not advisable. These areas have performed remarkably well and I see a lot of deterioration, which suggests that the markets are worried and that 12 months out things will not be as strong in these areas as they look right now.

"For stocks, we would maintain a defensive positioning for at least the next four to six months. Seasonally, we tend to have a nice market rise in the fourth quarter even in years when the stock market has been down. Therefore, I would look to become more aggressive towards the end of the year. But for now defense is the name of the game. One defensive stock in the consumer staples area that I like is Sysco (SYY NYSE), which is not the router maker, but the food distributor. It has had phenomenal performance over the last five years, while the average stock has been down. It’s a highly fragmented industry that allows a big dominant player to consolidate and expand and grow its margins. That’s likely to continue to be the case.

"Another stock I like that has a good future is Nestle (NSRGY Other OTC), which is an extremely defensive Swiss company, that is the biggest food company in the world. Over the long term, the stock has had impressive earnings performance even though that hasn't been reflected in the share price. This is a company that doesn’t really operate on a quarter-to-quarter basis, which is the reason why it has not been listed on the NYSE. But there’s great potential there. The great strength of the company is its amazing ability to go into local markets and adapt to the local tastes, have a local marketing strategy, and develop local brands that do very well. They have shown very strong adaptability."

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