‘The vast majority of defensive businesses look expensive today. They’re expensive in their own right, but particularly so relative to the value on offer elsewhere. Those seeking security in recognised defensive businesses are missing better opportunities.‘
I wrote that on 28 January in a post titled The difference between defensive businesses and defensive stocks. The four months since have been stupendous for those that owned the ‘better opportunities’. While investors in high quality blue chips like Telstra, QBE and Woolworths have seen their portfolios stagnate or fall (Telstra and QBE are down 13% and 21% respectively, while Woolies’ share price hasn’t budged), formerly pummelled stocks have risen like Phoenix from the ashes.
In The Intelligent Investor’s model growth portfolio, which fell 47% in the 12 months to December 2008, Macquarie Group and Harvey Norman are up 38% and 45% respectively. Flight Centre is up 35% and RHG a whopping 173%.
We’re not selling any of those stocks – they still look cheap on an absolute basis. But the gulf that existed between them and the defensives is nothing like it was.
We may have seen the worst, but I doubt we’ve seen the last of the global economy’s woes. The massive fiscal and monetary stimuli are obviously making a difference. But they come with a price tag attached. What the consequences will be nobody knows, but hyper inflation, debilitating deflation, currency runs and potential government defaults are all on the cards.
For mine, there’s a very good case for shifting your portfolio back towards those businesses with guaranteed customers and pricing power. In stark contrast to the situation four months ago, Telstra and QBE look relatively good value.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.