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    The First Cut: Defensive Growth

    The First Cut: Defensive Growth Splash image

    Concerns over a slowing economy coupled with inflation have some investors rotating to more defensive non-cyclical industries. Companies in these defensive industries supply consumer staples that individuals need to buy during both good and bad times, including food, beverages, personal and household products, and even tobacco and liquor. In contrast, the sale of products such as autos, appliances, and even apparel tends to be more sensitive to personal income and interest rates.

    This issue’s First Cut seeks stocks in the consumer non-cyclical sector that are trading with PEG ratios below the norm for their industry, while exhibiting price momentum over the last six months greater than the norm for their industry. The top 30 stocks with the lowest PEG ratio made the First Cut.

    The PEG ratio is computed by dividing the price-earnings ratio by the earnings per share growth rate. The First Cut screen uses the forward (normalized) price-earnings ratio, which divides the current price by the expected earnings for the current fiscal year, as well as the long-term (three to five years) consensus earnings growth rate estimate. This forward-looking ratio attempts to identify companies trading with attractive price-earnings ratios relative to anticipated earnings growth. The price momentum screen highlights stocks that have recently outperformed their peers.

    The First Cut listing also includes the company’s average price-earnings ratio over the last three years to help assess the relative level of the forward price-earnings ratio. The historical earnings growth rate is presented to provide a comparison against the expected earnings growth rate. The market capitalization provides an indication of the company size, since some investors prefer larger, more established firms during economic downturns.

    When analyzing these stocks, keep in mind that, while consumers purchase food, tobacco and beverages throughout the economic cycle, shifts in purchasing habits are common as consumers can switch to cheaper brands. Overall industry and product trends independent of the economy must also be considered.