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THE FINANCE GHOST: When defensive is too expensive

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Sure, quality companies with predictable revenues and cash flows are a must-have in share portfolios — but be careful how much you pay for them, writes FinanceGhost.

What makes a stock defensive? Why do investors look for this characteristic in tough times? Most importantly, why do defensive stocks sometimes generate negative returns for investors, despite their description?

Let’s start with the basics. When investors talk about a defensive stock, they are specifically not talking about a cyclical company that can experience immense swings in profitability. We have two recent examples on the JSE, with Astral Foods reporting a drop of up to 90% in headline earnings per share because of almost impossibly tough conditions in the poultry industry, while ArcelorMittal South Africa guided for a drop of 60%-65% in HEPS thanks to several exogenous factors...

 

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