Why these 3 stocks could offer defensive appeal as the FTSE 100 falls

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Why these 3 stocks could offer defensive appeal as the FTSE 100 falls
Master Investor Magazine

Master Investor Magazine Issue 58

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Robert Stephens, CFA, discusses the prospects for three stocks that could offer defensive characteristics in the wake of the coronavirus outbreak. 

Having reached its highest level since July 2019, the FTSE 100 has fallen by 3.4% in the last six working days. Investors are becoming increasingly concerned about the potential impact of the coronavirus on global supply chains, as well as on the performance of the Chinese economy.

At the moment, there is no way of knowing the eventual extent of the virus’ impact on global GDP growth. Past viral outbreaks such as SARS and ebola have generally caused a relatively short-lived impact on the FTSE 100 and other major indexes. However, investors may wish to consider companies that offer defensive characteristics at the moment in case it’s different this time.

Gold potential

At the same time as the FTSE 100 has fallen, the gold price has risen. It is now trading at a three-week high, and is 1.8% up on its price from six working days ago. Further gains would be unsurprising, since gold’s position as a store of wealth has often attracted investors to it in past downturns.

This is good news for gold miners such as Centamin (LON:CEY). The single-site operator has experienced some operational challenges in its recent past which have held back its shares, although it was the target of a potential bid approach last month.

Centamin’s third-quarter production update showed that it is on track to meet its own production guidance for the full year. It updates the market this week on fourth-quarter production, while its forward price-earnings ratio of 17 suggests it may not yet be overvalued.

Healthcare prospects

The rising concern regarding coronavirus could lead to a mixed outlook for healthcare stocks such as GlaxoSmithKline (LON:GSK). On the one hand, the defensive nature of the industry may mean it is appealing to investors. But, on the other hand, a lockdown in China may disrupt the global supply of pharmaceutical ingredients.

In GlaxoSmithKline’s case, its ingredients are dual sourced and it conducts risk assessments regarding their availability. It is in the process of changing its overall business model, with it entering into a consumer health joint venture with Pfizer. At the same time, it has strengthened its pharma business as it seeks to rejuvenate its bottom line after a lacklustre performance in the past few years.

Trading on a price-earnings ratio of 14.9 and being forecast to grow its earnings per share by 6% next year suggests the stock could be an appealing defensive opportunity.

A changing industry

In the past, obvious defensive candidates were often found in the tobacco sector. However, the pace of change being experienced by British American Tobacco (LON:BATS) and its peers means they may offer less robust financial prospects than in the past.

Regulatory changes in next-generation products and declining consumer interest in cigarettes mean that the tobacco sector faces a period of rapid evolution.

Still, the company’s cigarette brands offer resilient growth due to their pricing power. Its strategy to cut debt and grow its e-cigarettes business suggests that a price-earnings ratio of 9.9 offers a margin of safety.

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