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Credit Suisse picks stocks to buy for an “all-weather” defensive portfolio

It’s not easy to ignore the sea of red as our market is getting hammered again today with just about every sector in the losing ground.

That pretty much sums up the month of October and if you thought traditional safe haven stocks (often called “expensive defensives” for their high valuation and relatively stable income) such as Sydney Airport Holdings Pty Ltd (ASX: SYD) and Transurban Group (ASX: TCL) offered some protection from the storm, you’d be disappointed.

It feels like we need new safe haven stocks to ride out the volatility and the analysts at Credit Suisse have put on their thinking hats to come up with stocks to buy and sell (or short-sell) to construct an “all-weather portfolio”.

“Currently, the market is not sure whether expensive defensives are truly defensive,” said Credit Suisse.

“Investors are toying with the idea of value stocks being more defensive than defensives themselves. And as this uncertainty phase plays out, there is much speculation and angst.”

How to pick alternative safe haven stocks

The trick is to be sector or category agnostic and to focus on the characteristics of the stock instead, according to the broker. A quality large cap stock will need to check the following boxes:

  1. High returns on equity
  2. High returns on assets
  3. High dividend payout ratios
  4. High earnings certainty, as proxied by low earnings forecast dispersion
  5. Low beta, as measured on an historical five-year basis
  6. Strong growth in earnings, measured using a blend of historical and forecast rates

Stocks that make the cut

Stocks in the S&P/ASX 100 (Index:^ATOI) (ASX: XTO) that fit the bill and are rated “outperform” by Credit Suisse includes gaming machine maker Aristocrat Leisure Limited (ASX: ALL), blood products group CSL Limited (ASX: CSL), mineral sands miner Iluka Resources Limited (ASX: ILU), fund manager Magellan Financial Group Ltd (ASX: MFG), packaging group Amcor Limited (ASX: AMC) and online auto classifieds company Carsales.Com Ltd (ASX: CAR).

On the flipside, large cap stocks at the opposite end and are rated “underperform” by the broker include Sydney Airport and stock exchange operator ASX Ltd (ASX: ASX). These stocks make ideal short-selling targets as well.

Short-selling is when an investor borrows a stock and sells it on-market in the hope of buying it back at a lower price later to profit from the difference.

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Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd. and Magellan Financial Group. The Motley Fool Australia owns shares of and has recommended Transurban Group. The Motley Fool Australia owns shares of ASX Limited. The Motley Fool Australia has recommended Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.