As Risk Rallies, Don’t Ignore Defensive Stocks Says Haverford’s Smith


The S&P 500 crossed a key psychological level this morning, breaking above 1,400 for the first time since May. Volume and sentiment remain low, but investors are rotating back into risky assets. We've seen this shift over and over this year, which is why investors should remain level-headed and not take on the all or nothing, risk-on versus risk-off trade.

"We continue to maintain a strategy of a balance between your defensive steady eddies, like a Johnson & Johnson (JNJ) and then your more offensive, cyclical-type companies, whether it's a Dupont (DD) or Eaton (ETN), a company that has more exposure to the economy," says Hank Smith, chief investment officer at Haverford. "But we don't think you can ignore the defensive companies, and J&J is truly a poster child."

While defensive in nature, J&J has been hit with some negative headlines this year. The most recent was yesterday's announcement that it dropped further research on a highly anticipated Alzheimer's drug; a joint effort with Pfizer (PFE). And the company's McNeil unit, a major part of J&J's consumer division responsible for producing brands such as Tylenol, Motrin, and Splenda, has struggled with various recalls over the last several years.

Nonetheless, Smith is optimistic that the recall problems are behind them and continues to focus on the J&J's "modest valuation" and attractive 3.5% dividend yield.

"If it's a risk-on market and J&J does not participate, you're getting paid to wait, and that's a very important attribute," he states.

Furthermore, Smith is not concerned about the impact of the stronger dollar; a headwind cited in numerous second-quarter earnings reports.

"Currency is a short-term issue, it's not a secular long-term issue," he says. "Just because the dollar is strengthening, that does not take away the intermediate and longer term case for owning companies that have exposure globally and particularly to emerging and developing economies."

If you're worried about the risk-on trade taking off and you're not a part of it, don't fret. "A balanced portfolio is the right strategy here between exposure to the defensive steady eddies and the more economically cyclical companies," advises Smith.

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