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Andrew Allentuck

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The best offence is a good defens-ive stock

Andrew Allentuck


August was a month most investors would rather forget. The worst of the month’s meltdown, which saw the TSX lose 584.98 points on August 16 in intraday trading, was driven by panic selling as frightened investors rushed to raise cash.

Good stocks were trashed along with the bad. What was left was a trail of potential bargains for those brave enough to plunge into a liquidity crisis that has yet to end.

The mid-August crash was an unusual event, for it showed that stocks that had been thought defensive were vulnerable to market forces. The stocks that survived the month with relatively small losses were a subset of large mid and cap consumer products companies, drug stores, some grocery products manufacturers and a large tobacco company, explained Matt Baillie, a portfolio manager who heads the $122-million Sceptre Canadian Equity Fund.

“A lot of the credit crunch was about the transparency of assets held by financial institutions,” Mr. Baillie said. “The issue was valuation of assets, especially derivatives, held by banks and hedge funds. Some hedge funds in the U.S. that were designed to thrive on market downturns actually had to close their doors. Instead, the winners were companies that were transparent in their accounting, that were easily understandable, that had strong balance sheets with little debt and that sold products bought by everyone.”

A winner in Mr. Baillie’s portfolio was Shoppers Drug Mart, which had gained one dollar by August 31 over its $52.26 price on July 31, though the stock did lose 90 cents in trading on August 16. It is still in his portfolio, a growth stock that has shown its defensive potential. Another of Mr. Baillie’s companies that escaped much of the mayhem was Tim Horton’s Inc., which rose to from a July 31 price of $32.91 to close on August 31 at $35.00 even though it lost 53 cents by the market close on August 16. The rally in the stock in a tough month showed its resilience. “These companies sell mundane products, are growing at double digit rates and have good management,” Mr. Baillie said. “They also did not have - as far we know - any exposure to the credit derivatives that the market was worrying about.” Stocks that hold their value in bear markets and grow in bull markets are likely to be prized by investors.

Not all consumer staples companies fared equally. Connors Bros. Income Fund, which cans tuna and a variety of other foods, lost 90 cents to close at $7.15 on August 16. It was pulled down by announcements in July and August that it would suspend dividends to preserve cash needed to pay for a product recall. Down from levels as high as $20 in 2005, Connors Bros. could bounce back if it solves its production problems and if the Canadian dollar weakens so that the U.S. dollars it gets from selling its products south of the border translate into higher Canadian dollar earnings.

Beverage maker Cott Corp., which has tumbled from $20 in 2006 to a recent price of $12 per share, lost 11 per cent between August 1 and August 31 on internal earnings issues. Yet Cott could be a cyclical recovery stock. Meanwhile cheese maker Saputo Inc. held up fairly well, losing only 35 cents in the month to close at $50.75, a trifle more than its gain on August 16 as investors decided that mozzarella was the place to be. Cheese is not usually exciting to investors, but Saputo has record of strong earnings growth through acquisitions. It is edging away from its roots in Montreal and has entered the U.S. dairy products market.

Some investors accept litigation risk inherent in cigarette maker Rothmans Inc., which slid a little on August 16 to $21.00 from $21.38 the day before. Rothmans closed the month at $22.52, up from $20.95 on July 31. The Canadian market for cigarettes is shrinking, but the regulatory climate has eliminated new entrants into the smokes business. Government restrictions on advertising hold down marketing costs. Capital expenditures are modest and customers are famous for brand loyalty. No one expects Rothmans to turn in the performance of a soaring tech stock, but its 5.3 per cent dividend yield should continue to lure investors.

Smokes and donuts, soda pop and tuna fish ought to be recession proof. However, the differing fortunes of the companies that make them show that it is vital to examine each business. A diversified portfolio with some relatively inexpensive value stocks, some growth stocks and some government bonds in case all else fails is likely to provide if not the highest rates of growth, a relatively stable and sustainable rate of return. If you don’t bet the shirt on your back on a single sector or concept, you are also not likely to lose it.

Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.

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