The best defense?

Market uncertainty forces recession-proof stocks to retreat

The American economy is robust. Fourth-quarter corporate earnings have exceeded expectations. Consumer confidence remains at an all-time high. Market analysts and stock-pickers harbor cautious optimism. For good reason: the Dow broke 9500 and then seesawed.

Traditionally, such activity would prompt investors to purchase shares of so-called defensive stocks — triedand-true companies that hold up in times of market uncertainty. These recession-proof equities have largely been household names that produce consumer staples, ranging from food to soap powder. They have included such blue chips as Coca-Cola and Colgate-Palmolive.

Over the past year, these stocks have lost their strength. “Last October, investors rushed to buy the Cokes, Pepsis and Gillettes of the world,” says C. Kim Goodwin, lead portfolio manager of the $ 7.5 billion American Growth Fund, and a member of the B.E. Investment Roundtable. “These are typically regarded as safe havens because when growth slows in the U.S., they make it up because of their emerging markets exposure.”

What weakened the mighty was their reliance on Pacific Rim and Latin American markets. Take Coca-Cola (NYSE: KO) for example. Sluggish Asian economies have weakened shares — a continuation of a trend that started in 1997. The devaluation of Brazil’s currency has further taken the fizz out of the soft-drink maker. In 1998, Coke’s stock bounced as high as $ 87.94 a share and dropped as low as $ 56.19. The stock currently trades at $ 67.50 a share.

Colgate-Palmolive (NYSE: CL), too, has been soiled by such developments as well. On January 13, the household products company, which receives as much as 40% of its revenues from Latin America, was downgraded by analysts from “buy” to “market perform.”

In fact, the S&P 500 and the Nasdaq Composite has outperformed the Dow, on a percentage basis, because of the unspectacular returns of Coke and other industrial laggards on the index. In the past 52 weeks, ending January 22, the Dow was up 18.4%, compared to 27.9% for the S&P 500 and 48.4% for the Nasdaq Composite. The heavy weighting in the volatile technology sector, which includes such powerhouses as Microsoft (Nasdaq: MSFT) and America Online (NYSE: AOL), vaulted both indices to astronomical highs. (See charts of indices, this page.) Then again, a Dow headed for 10,000 is nothing to bursh off.

How should you size up these developments? In the new economy, defensive stocks will be redefined. Today, analysts describe such telecoms as AT&T (NYSE: T) and MCI WorldCom (Nasdaq: WCOM) as the new breed of defensive stocks.

Secondly, take the long-term view and hold onto what you’ve got. As P/Es come down to more reasonable levels, scoop up cheaper shares and reap significant gains when these companies rebound.

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