Defensive Bargains

04/29/2005 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

For those seeking a balance of growth and value, don't miss the workshop from Jamie Dlugosch. Despite his growing cautiousness towards the general market, he notes, "there are still some terrific bargains." Here are two of his "defensive" favorites.

"The best consumer goods company in the world is Procter & Gamble (PG NYSE). With over $54 billion in sales, PG is a global behemoth with brands like Crest and Ivory. And people need toothpaste, shaving cream, and cleaning products in good times and bad. Recently, the strength of PG increased considerably with its announced purchase of Gillette. With that deal, the venerable Warren Buffett stated that he would be buying additional shares. This clearly fits the profile of a defensive company. The only question is whether we can buy PG for a reasonable price. The answer to that is an unequivocal 'yes'. Analysts expect the company to make $2.63 in the current fiscal year ending in June and $2.88 the following year. That gives the company a forward multiple of 18. A small dividend of 1.3% augments the potential for growth. Buy up to $55; my target is $65.

"Investors will sometimes confuse 'defensive stocks' with 'defense stocks.' In the case of Lockheed Martin (LMT NYSE) the terms are mutually inclusive. Building the military is expensive and a great insulator against economic contraction, and the re-election of President Bush ensured a favorable environment for entire defense industry. From a pure cash-flow standpoint, there are few companies that can compete with LMT. It is a moneymaking machine. LMT represents great value for investors seeking safety in a turbulent market. The company offers a dividend of 1.6% for further insulation. Right now, analysts expect 17% growth. I may be going out on a limb here, but there are few stocks that offer a more compelling value play with a real opportunity for appreciation. And if the economy does falter, LMT would make for a solid defense. I would be a buyer up to $65; my target is $80."

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