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Why Defensive Stocks Are Still Not Cheap

Why Defensive Stocks Are Still Not Cheap

After leading the market for much of the year, defensive stocks such as consumer staples and utilities have been sliding since mid-summer.

After leading the market for much of the year, defensive stocks such as consumer staples and utilities have been sliding since mid-summer. The S&P 500 Utilities Index is down 10% from its July peak, while consumer staples companies are down 6% (source: Bloomberg). Minimum volatility strategies, which often emphasize these "low beta" names, are also underperforming after a strong start to the year.

Given the recent retreat and more reasonable valuations, should investors be giving these sectors another look? Not yet. Here's why.

No good bargains after all

Utilities, consumer staples and other defensive names are still expensive relative to their history, and in many cases, their fundamentals. Large cap utilities stocks are trading at a premium to their 20-year average relative price-to-earnings (P/E) and price-to-book (P/B) ratios (source: Bloomberg). For example, over the past 20 years, the S&P 500 Utilities Index has typically traded at around a 25% discount…

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