Finding U.S. equities that play defence

What are we looking for?

A defensive strategy for buying U.S. stocks in volatile times.

More about today's screen

Last week, Morningstar CPMS helped us find a portfolio of Canadian stocks that have shown resiliency during recent market downturns. Today, we'll apply much of the same criteria for finding U.S. stocks to provide some insight on where investors may want to seek shelter if markets continue their stomach-churning ride.

This screen tests a portfolio of 30 U.S. stocks applying buy and sell criteria every month since the end of 1993.

To make the list, stocks must:

– Be relatively liquid. Those with a market capitalization in the bottom quarter of the overall market were excluded;

– Have dividend yields above 1 per cent;

– Have low earnings and price volatility, with stable, consistent profits and no negative analyst estimate revisions;

– Have low price-to-book and price-to-sales ratios.

To ensure sufficient diversification, the portfolio was also limited to a maximum of six stocks per sector.

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus more than 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What did we find?

Impressive returns that not only provided a sense of stability during downturns, but beat the broader market over the long haul. Average annualized returns from the end of 1993 to the end of this past July were 13.6 per cent, compared with 8 per cent for the S&P 500.

"By focusing on defensive characteristics, the portfolio was able to achieve strong long-term returns with considerably lower volatility than the S&P 500," said Craig McGee, a senior consultant with CPMS, who ran the numbers for us.

"Not only did it excel during down markets but it was also able to keep up fairly well during stronger periods, outperforming the index in eight of 13 up years. Investors could be well be positioned with a defensive approach if volatility in the market continues."