Stocks to beat a correction

Johannesburg - As many market participants expect an equities pull-back after a sizeable rally since March, some investors might be looking for shares that offer defensive qualities, as company earnings fail to keep pace with share price appreciation.

The volatility index in the US - the VIX - has started to rise ahead of September, traditionally the most volatile month in the US equities market. September also marked the one-year anniversary of a spectacular equity market sell-off in 2008, sparked by the collapse of high-profile investment firms, including Lehman Brothers.

"We remain of the opinion that we are engaged in a bear market rally of substantial proportions which will be written about in future textbooks, and in such an environment the power of momentum trading remains the dominant driver of price action," said Ernie Gruhn of stockbrokerage Imara SP Reid in a morning commentary to clients.

Warwick Lucas, an analyst at Imara SP Reid, cautioned investors should be clear about what they define as defensive stocks, pointing out there is a difference between defensive earnings and defensiveness in the share price.

Lucas' picks included SABMiller, British American Tobacco (BAT), Tiger Brands, MTN, Pick n Pay and Distell, as well as pharmaceutical firm Cipla Medpro.

Rory Mackay, CEO of Justrade told Fin24.com he believes MTN, Vodacom, BAT, Pick n Pay and either SABMiller or Distell would be the most defensive.

He said people would for instance continue to consume alcohol - specifically wine and beer - and while spend per head may drop marginally, it is not something that will be cut out completely.

He is less bullish on the prospects for pharmaceutical firms, which have often been regarded as defensive in nature.

"Pharmaceutical and healthcare stocks in the US have been downgraded on the back of potential reforms to be introduced by the government, and I would be wary of a similar thing happening here," he said.

Paul Theron of asset management firm Vestact said another significant downward movement is "unlikely", but identified the following stocks as being the most defensive:

Aspen

The group's local generic drugs business is being supplemented by new state medical expenditure on anti-retrovirals. Even more promisingly, the products being acquired from GlaxoSmithKline are solid cash generators around the world.

MTN

Consumer spending on mobile telephony seems to be largely recession-proof. MTN also has increased exposure to rapidly expanding markets like Iran, while the Bharti deal also bodes well.

PPC

The cement producer has bottomed out, in line with cement sales. High margins and dividend history make it a good stock to fall back on in trying times.

Naspers

The group's major cash engine, Dstv, seems to be growing its subscription base. In a recession, the middle classes will stay at home and watch TV. The group is also well diversified.

Tiger Brands

Strong cash flows, a good dividend history and a well balanced business will attract the "everybody has to eat, even in a recession" crowd.

- Fin24.com