There is plenty of talk swirling around about the recent market jitters and the potential for recent moves to be the beginning of a serious market correction.
Given most investors' memories will stretch back to the severity of the Global Financial Crisis (GFC), it's understandable that some people are starting to get nervous.
Of course, despite plenty of "experts" making predictions no one really knows what the future holds. It's for this reason that investors can be taking a big risk if they decide to sell out of stocks in the hope of raising cash levels and accurately timing their re-entry.
Arguably, a better strategy is to own defensive equities…
There are four factors which need to be considered when identifying a truly defensive company.
- High quality, reliable revenue streams
- Solid balance sheets
- Maintainable and ideally growing dividends
- Available at a reasonable price, compared with a conservative assessment of value
It is this last point where many stocks stumble, not least because investors have been flocking to defensive, blue chip stocks ever since the GFC, which has driven up many share prices.
So, while a company like hospital operator Ramsay Health Care Limited (ASX: RHC) may meet the first three criteria, arguably the stock is richly priced and this means the stock could be set for a larger-than-expected fall during a severe bear market correction.
A similar case could be made for a number of other companies in the health care space such as ResMed Inc. (CHESS) (ASX: RMD), which despite being defensive in nature has a relatively lofty share price.
In contrast, Telstra Corporation Ltd (ASX: TLS) looks to display all of the above requirements. On valuation, the stock is trading on a forward price-to-earnings ratio of around 15x and with a forecast fully franked dividend yield of 5.9%.
