Wednesday, October 14, 2009

A look at 5 Defensive Plays 1 Year Later!

Here is a look at five defensive stocks I wrote about 1 year earlier and where they are now. The market was tanking but did not reach a bottom for another 5 months. Keep in mind that their are many fundamentals to look for when picking individual stocks, however I tried to kept it simple with just a few important ratios mentioned here.

1) The P/E ratio All five stocks mentioned at the time had a P/E ratio of under 18. Only three currently have P/E's under 18.

2) Return On Equity or REO All had REO's of 14% or better while four of these still do. The higher this figure the better. REO shows how well a company uses investment funds to generate earnings growth.

3) Dividend Yield All paid dividends, and all have increased their payouts since.

4) Debt to Equity Ratio This is a measure of a company's financial leverage. Debt/equity ratio is equal to long- term debt divided by common share holders' equity. Generally the lower this figure the better. Last year P&G had the highest D/E ratio in this group which was .52 today it stands at .33 .

These are the types of companies that the legendary investor Warren Buffett invests in. In fact Coca Cola (KO), Costco (COST), Johnson & Johnson (JNJ), and Proctor & Gamble (P
G) are a part of Buffett's holding company Berkshire Hathaway. The five stocks mentioned returned a combined 11.05% before dividends. If you add on the average annual dividend yield of 2.67% for these five companies over the past year you will get a 13.72% total return. You will notice that all five issues are companies that make products we use and consume everyday, which is another trait that Buffet looks for.

One year later three out of five still look reasonably priced, those being HRL, JNJ, and PG.

Author currently long JNJ.

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