Three defensive stocks to hedge your risks this year

Key Points

• The market could show a slowdown, or at least this reliable indicator suggests.
• Three stocks could continue dancing if the music stops and the market throws a tantrum.
• Analysts still see them growing tremendously, giving you the safety and profit potential your portfolio could need in an "if the world ends" scenario.

As the new market cycle starts, a few uncertainties come with how the Federal Reserve (the Fed) will potentially cut interest rates. Some traders still need to buy the promises, judging by how 10-year bonds remain between 4% and 4.1% in yield. 

What can investors like yourself do to prepare against a possible market tantrum? What would your portfolio look like — as it stands today — if the market were to sell off on the FED announcing it is delaying rate cuts. You may be in trouble if you don't own enough "defensive" names, known for their immunity to the business cycle.

Considering stocks like Procter & Gamble Co. NYSE: PG, The Clorox Company NYSE: CLX, and even Colgate-Palmolive Company NYSE: CL can be a great way to start diversifying into better opportunities.

Cracks in the structure

The S&P 500 and the NASDAQ indices have hit fresh, new all-time high prices. While this may sound extremely bullish, Wall Street veterans would tell you never to take anything at face value.

Zooming into reality, you can see why the music could stop and end the party sooner than most people thought. A reliable technical indicator, the advance/decline ratio, measures how many stocks rose versus how many declined on any given day for an index.

What is troublesome for the NASDAQ and the S&P 500? This ratio has diverged to the downside for the past quarter, meaning that while the indices kept breaking past their ceilings, most stocks within them have been struggling to follow, which is never a good sign.

Far from meaning that the stock market could soon see a big sell-off, it is a warning sign. Combined with the hard basement that bonds have set at 4%, it is almost like the market has said, "We don't buy the rate-cut story just yet." 

It's why playing defense may be more important for your portfolio today.

How much protection can you give your portfolio by exposing it to some of the consumer staples names? 

Look at the performance gap between the Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP against the broader S&P 500, up nearly 22% over the past year.

Where can you find a discount within this discount? Or, if it’s more your preference, momentum within this contraction? Check out this list of promising stocks.

Get selective

When breaking down the consumer staples sector into the more specific cleaning materials industry, it is where the trio begins to shine. If the economy does fall into a slowdown, or the market decides to come down before continuing up, which businesses stand the best chance of attracting more earnings?

You still need to shower, brush your teeth and clean the house, so if rates remain higher for longer, rising unemployment will likely not make a dent in these names.

Even though the consumer staples ETF has barely moved for the past year, Procter & Gamble, Clorox and Colgate are all trading within 95% of their 52-week highs. 

The market is beginning to favor their defensive nature in the face of uncertainty, but there's much more to it than that.

The price-to-earnings ratio for the market sits around 26.3x today, which is higher than the long-term historical 15x to 18x valuation ranges. Acting as the "value" benchmark, you can see why these stocks look more attractive today.

Despite a possible market valuation top, analysts are comfortable assigning attractive growth prospects for these names. Measured by earnings per share growth projections for the next twelve months, Procter & Gamble expects 8% growth, Colgate sees 7.8% and Clorox sweeps everyone off their feet with a massive 27.2% projection.

Known for their low-beta personalities and defensive nature, analysts predict more upside than the market in these names. If the music does stop, consider adding these to your watchlist.