BOSTON (TheStreet) -- The markets are surely in for more tumultuous days as the European sovereign debt crisis comes to a head and the U.S. economy struggles through its current malaise.
That's why many investors have decided to head for the relatively safe, but meager, yields of the bond market, although the
is still in positive territory, up 2.6% this year as of June 1.
It's been a disappointing performance after the 12% gain in the first quarter, followed by a face plant in May, and that has left many with a foreboding that we're in for a repeat of the 2008 financial crisis.
But that doesn't mean investors have to give up the ship and jump in the bond-market lifeboats only to then have to fret about the prospect of inflation draining their returns.
That's because there are always a few defensive-stock stalwarts to hide in so as not to miss out on an unexpected market rebound, as so frequently happens after a market selloff.
In light of that, a Morningstar analyst identified about a dozen of the ratings firm's highest-ranked mutual funds that have consistently beaten their peers during previous downturns, including the gut-twisting decline of 2008, to give investors some alternatives to the stodgy fixed-income marketplace.
I then cherry-picked those funds to identify some of the stocks that appear most frequently among their top holdings, excluding
, given that it's a top holding of virtually every large mutual funds these days.
Many of the stocks in these funds are tried-and-true defensive stocks, a list that tends to get dominated by consumer-staples companies, such as household products maker
and health-care conglomerate
Johnson & Johnson
Neither one has impressive share-price return records, but their healthy dividends, fortress-like balance sheets and industry-leading positions underscore their appeal when times are tough.
These defensive funds also favor retailers that cater to budget-conscious consumers, such as discount clothier
and the world's largest retailer,
Among the best defensive funds cited in the report by Morningstar analyst Adam Zoll are the $5 billion
FMI Large-Cap Fund
as this large-blend fund has an enviable record bolstered by both Kimberly-Clark and Wal-Mart.
It outperformed the market during the downturn of 2008, when it lost 27% (compared to the 37% drop of the S&P 500) and during the start of the rebound in 2009, when it gained almost 30%, versus the 26.5% return for the S&P 500. Its annualized five- and 10-year records put it in the top 5% of the funds in its category.
Another cited by Morningstar is the $1.3 billion
Amana Trust Income Fund
, which only buys stocks of companies in businesses that are in accordance with Islamic law. That means it eschews alcohol, tobacco, gambling, pornography and pork companies' stocks, as well as those paying or receiving interest. That last limitation helped it dodge the meltdown of the financials sector a few years back, but it missed out on their subsequent rebound.
Still, it has a three-year annualized return of 9.2% and a 10-year return of 8.2%, which puts it in the top 1% of funds in its large-blend category for the decade. Morningstar says "it's an excellent core stock fund not just for Muslim investors, but for anyone seeking stability and a decent yield," currently at 1.54%.
Sports apparel behemoth
is the fund's largest holding at 2.5%, and it has been in the portfolio since the start of 2007. Computer software and hardware conglomerate
is also a top holding, as it is with many other top-rated Morningstar funds.
2.8% dividend, coupled with strong long-term prospects, has helped it garner 15 "buy" ratings from analysts. Standard & Poor's has it as a "buy" with a $37 price target, which is a 30% premium to its current price.
Regularly one of the favorite ports in a market storm for many investors is the $10 billion
Vanguard Dividend Growth Fund
. Its 25.6% loss in 2008, when the S&P plummeted 37%, helped put it in the best-performing 3% of all large-blend funds for that year, according to Morningstar. Its five-year record puts it in the top 2% of the funds in its category. The dividend yield is 1.99%.
Johnson & Johnson is its second-largest holding at 3.3% of the fund, and Microsoft is not far behind at 3.2%.
The $80 billion
is another Morningstar bear market pick, as it is up 5.5% this year and weathered the market's gyrations over the past decade to post a 10-year average annualized return of 7.2%, a performance that puts it in the top 3% of its large-growth fund peers.
Among its top long-held picks are TJX, which has been in the portfolio since 1995 and is now its eighth-largest holding, and household products giant
, a top-20 holding since 1999.
Here are eight stocks held by top-rated Morningstar "defensive" mutual funds that have weathered previous market backslides in fine form, ranked in inverse order of analysts' "buy" ratings:
Kimberly-Clark, with a market value of $31 billion, is a leader in the health and hygiene category products category, selling bathroom tissues, diapers, feminine products, and paper towels, worldwide. Its well-known brands include Kleenex, Scott, Huggies, Pull-Ups, and Kotex.
Its shares are up 7.4% this year and have a three-year, average annual return of 17%. Its five-year average annual return is 4.8%. Analysts give its shares one "buy" ratings, one "buy/hold," 12 "holds," and two "weak holds," according to a survey of analysts by S&P.
Despite tough competition and a weakening economy, its earnings are expected to hold up as analysts expect it to earn $5.15 per share this year and that that will grow by 7% to $5.53 next year.
Colgate-Palmolive, with a market value of $46 billion, is one of the world's largest consumer product companies as a maker of
and detergents, shampoos, shower gels, deodorants, and shaving products. S&P notes that "demand for household and personal care products is relatively static, and, in mature markets, not likely to be affected much by economic conditions," hence its appeal right now.
Its shares are up 5.7% this year, a three-year, average annual return of 14% and a 10-year annual return of 7.4%. Analysts give its shares four "buy" ratings, three "buy/holds," 17 "holds," and one "weak hold," according to a survey of analysts by S&P.
For fiscal 2012, analysts estimate it will earn $5.40 per share, and $5.92 in 2013, which is 10% growth.
Wal-Mart, with a market value of $224 billion, operates retail stores in various formats worldwide, including retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam's Clubs, as well as walmart.com and samsclub.com.
Its shares are up 11% this year and have a three-year, average annual return of 11%. Over five years, it has an average annual return of 7.6%. S&P, which has its shares rated "buy," with a $69 price target (it was $65.55 on June 1), found eight "buy" ratings from other analysts as well as four "buy/holds," 18 "holds," and one "sell," according to its survey.
ExxonMobil, with a market value of $362 billion, is an integrated oil and gas company that explores for, produces, and refines oil around the world. It is the world's largest refiner and one of the world's largest manufacturers of commodity and specialty chemicals.
Its shares are
, but are up 5% over a three-year period and has a 10-year average annual return of 8.7%. S&P has it rated "strong buy," with a $103 price target, which is a 33% premium to its current price. Analysts give its shares nine "buy" ratings, three "buy/holds," and eight "holds," according to a survey of analysts by S&P.
TJX, with a market value of $30 billion, is the largest U.S. off-price family apparel and home fashion retailer, operating several chains of apparel and home goods specialty stores in the U.S., Canada, Germany, Poland, Ireland and the U.K.
Its shares are up 28% this year, have a three-year, average annual return of 40%, and a 15% average annual return over the past decade. Analysts give its shares 10 "buy" ratings, six "buy/holds," and 12 "holds," according to a survey of analysts by S&P. For fiscal 2013, analysts estimate TJX will earn $2.42 per share and that will grow to $2.70 in 2013. S&P has it rated "hold" based on valuation concerns.
Johnson & Johnson
Johnson & Johnson, with a market value of $171 billion, is the world's largest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer.
Its shares are down 3.6% this year, but have a three-year, average annual return of 7% and a five-year average annual return of 2.5%. S&P has its shares rated "buy," with a $73 price target, which is a 17% premium to the current price. Analysts give its shares 10 "buy" ratings, four "buy/holds," and 12 "holds," according to a survey of analysts by S&P.
Analysts estimate it will earn $5.11 per share this year and $5.42 in 2013.
Microsoft, with a market value of $239 billion, is the world's largest software company as the developer of PC software, including the Windows operating system and the Office application suite.
Its shares are up 11% this year, have a three-year, average annual return of 12%, and a 0.4% return over five years. Analysts give its shares 15 "buy" ratings, eight "buy/holds," fourteen "holds," and one "sell," according to a survey of analysts by S&P.
S&P has it "buy" rated with a $37 price target, which is a 30% premium to its current price.
Nike, with a market value of $38 billion, is the world's leading designer and marketer of high-quality athletic footwear, athletic apparel and accessories.
Its shares are up 9.3% this year and have a three-year, average annual return of 22% and 14% over five years. S&P has it rated "buy" with a $130 price target, a 24% premium. Analysts give its shares 15 "buy" ratings, two "buy/holds," six "holds," and one "sell," according to a survey of analysts by S&P.
Analysts expect it will earn $4.93 per share this year, and that will grow by 17% to $5.78 per share next year.
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