DEFINITION of Defensive Company
A defensive company is a corporation whose sales and earnings remain relatively stable during both economic upturns and downturns. Defensive companies tend to make products or services that are essentials. That is, they are likely to be purchased whether the economy is booming or in a recession. At the opposite end of the spectrum are companies that rely heavily on the strength of the economy. These include restaurants and luxury goods companies that tend to do well when consumers are doing well financially and feel confident in their economic future. Defensive companies may lag behind other companies during periods of economic expansion due to the stability of demand for its products and services and also due to the surge in demand for discretionary goods that occurs during economic booms.
BREAKING DOWN Defensive Company
Defensive companies are found mostly in certain sectors and industries. Companies in the utilities industry, for example, are defensive because the demand for these goods and services does not soften along with a declining economy. Consumers and businesses need the basic necessities of electricity, water, heating and air conditioning whether the economy is in recession or not. Other defensive industries include cable and telecommunications, food retailing, healthcare, and companies involved in the distribution of food and energy. The relative outperformance of defensive companies during economic downturns forms the basis sector rotation strategies in which investors overweight and underweight sectors as the economy progresses through the business cycle.