With recent newspaper headlines suggesting the stock market is overdue for a correction and a sharp fall could happen any day, investors, while they shouldn't get alarmed, should review their portfolios and ask whether they have adequate downside protection.
Frothy markets such as these can leave investors owning overpriced stocks which can fall significantly during a market correction as the price premium disappears. The best way to protect your portfolio from such an occurrence is by not owning overpriced stocks.
One stock which is positioned to withstand market gyrations is leading blue chip retailer Woolworths Limited (ASX: WOW). Here are three reasons why Woolworths should be a key holding in a defensively positioned portfolio.
1) Choppy markets call for defensive actions. When it comes to a reliable revenue base it doesn't get much more dependable than companies such as Woolworths and Telstra Corporation Ltd (ASX: TLS) who provide everyday essential services to the majority of Australians.
Owning these types of defensive companies can protect investors because their revenue and earnings are so secure. This not only supports the share price in a falling market but importantly means dividends will continue to be paid.
2) Masters Home Improvement has a high chance of success. While many commentators have queried the move by Woolworths to take on Wesfarmers Ltd (ASX: WES) owned Bunnings, the company's track record at successfully managing supermarkets with world leading margins should provide some comfort that it will ultimately be successful at producing a decent return on shareholder funds.
3) Coles and Woolworths are increasing their market share at the expense of smaller competitors, particularly Metcash Limited (ASX: MTS). As Woolworths recent third quarter results showed, the retailer is reporting strong momentum across its key food and liquor businesses. This will underpin further growth in revenues and earnings.
