Stocks were lower again Wednesday morning alongside reports of a plunge in consumer confidence. There appears to be no end in sight for the continued volatility, meaning it may be wise to continue playing defense stocks. As discussed in previous articles, the typical defensive plays remain bloated. This refers to gold, which began to make gains again this morning, the Swiss Franc and other investments reserved for an uncertain economy. Investors have to be resourceful in selecting the areas they’ll pursue to pad their portfolios. One subsector they might want to consider is vice stocks. Given the addictive nature of substances such as alcohol and cigarettes, companies that sell them have tendency to produce consistent returns in any economy. This makes them an appealing defensive consideration. Not all alcohol and cigarette manufacturers are created equal; however. The best returns will likely come from companies that have an edge, for instance being in an emerging market or appear to be continually gaining market share.
Companhia De Bebidas (ABV) This Latin American based brewer dominates the market share in Brazil, accounting for nearly 68 percent of the nation’s beer. Beyond beer, ABV also produces non-alcoholic and non-carbonated products that it distributes across Latin America. The company has been seeing positive growth as well with second quarter normalized profit adding 20.4 percent on 2010’s numbers.
Their performance has been proven over the last decade with net income increasing at an average rate of around 14 percent. Impressively, the average return on equity weighs in around 27 percent.
These numbers, which include the 2008 recession, indicate the company has a history of strong performance in any market. This, alongside the fact that it benefits from the increase in consumer spending in an emerging market nation, like Brazil, means this company could be primed for a climb.
Philip Morris International Inc. (PM) Cigarette manufacturer, Phillip Morris, in spite of the best attempts of doctors and government agencies to discourage it, has exhibited stable earnings for over a decade. PM boasts a five-year average return on equity of 65 percent. They trade internationally, meaning their success is less reliant on the health of the U.S. economy. The popularity of cigarettes overseas , where there is less stigma against smoking than stateside, has continued to drive sales. The company reported 14 percent growth in diluted earnings per share and 10.2 percent growth in revenue for last quarter against 2010.
Diageo (DEO) Diego may not be familiar name to those who frequently peruse the liquor aisle but the names of the brands basked beneath the company surely would. The firm is responsible for 10 of the 20 premier liquor brands worldwide. Johnnie Walker, Tanqueray, Guiness and Smirnoff are all owned by Diageo. The brand recognition offered by Diageo allows the company to continue to charge higher-level prices in spite of competitive costs of production. Cheap liquor is often associated with headaches or less than tasty beverages, meaning people are more unwilling to part with their favorite luxury liquors than they may be with something else. Branding is among the hardest and most important elements within the liquor industry and Diageo appears to be a master.
The company distributes in over 180 markets, including emerging nations, which will help drive growth even when there is softness stateside. Prone to acquisition, Diageo is also looking to snap up brands that have already made a name for themselves in other nations and exhibited strong sales, contributing to immediate profits.
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