Continue to Add Defensive Names in Today’s Market

The stock market will always be volatile. In today’s environment, big daily swings have been the norm. For investors who are using those swings to pick up quality companies at a reasonable price, they’ll be rewarded on top of any trading income as well.

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  • Right now, markets are fearful over a potential decline in corporate earnings. That’s already been the case for a few quarters, but high energy prices this year are causing higher prices in everything from electrical generation to shipping costs.

    The most recent company to warn on shipping costs has been AutoZone (AZO). The automotive parts supplier has otherwise been a strong defensive stock, with a 36 percent rally in shares in the past year. Plus, the retail chain has seen a profit margin of 15 percent, fairly high by retail standards.

    That may edge down a bit on higher energy costs, but consumers have gotten used to paying more over the past two years with inflation rising. Chances are most, if not all, of those costs will be borne by end buyers.

    Action to take: Shares are trading at 17 times forward earnings, at the low end of the company’s valuation over the past two years. While shares don’t pay a dividend, they could continue to grow strongly in the years ahead.

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  • For traders, the high share price may make an options trade prohibitive. But the January $2,600 calls, last going for about $18.30, could deliver mid-double-digit returns in the months ahead.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.