This is the fourth post in our series: What football can teach you on Stock Investing? There are four player-positions in football-Forwards, Mid-fielders, Defenders and Goalkeepers. We can draw direct analogies from how they perform different roles. Companies and their stocks have different characteristics and perform differently under different conditions. In our last posts we told you about companies that fit the profile of Forwards & Midfielders.
In this post we talk about companies that can play the role of Defenders in your portfolio.
Who are Defenders?
Defenders defend their own goal and stop opponents from scoring a goal against them. Their job is to prevent the opponents marching towards their goal by tackling them and once they have the ball to keep it within them, progressing slowly till the mid-fielder and forwards are in position.
In a portfolio, companies that have stable (neither high, nor growing fast) earnings year after year even in tough economic conditions resemble Defenders. As compared to Mid-fielders and Forwards, these companies have slower growth rates and lesser opportunity to deploy back the money into the business. But, due to the stickiness in the customer base and strong brand equity in the market, they are able to generate high ROCE year on year.
Companies in defenders list have strong brands and franchises. However, they may not have a long run way as compared to Forwards and Mid-fielders as the categories could be well penetrated or the industry itself may be growing very slowly or prone to cycles. The key role the defenders have to play in the portfolio is providing an optimum mix of stability and steady returns that may include dividends; even during tough economic conditions when others may have performance challenges.
Following are the characteristics we look for while choosing the Defenders in the portfolio:
- Companies having sound business models, slow growth and large market shares in reasonably penetrated categories.
- Companies in industries having short cycles e.g. Automobiles, Consumer Durables.
- Companies having strong brand equity, strong distribution network and ability to upgrade the customers to premium range of products.
- Companies having economies of scale.
Defenders unlike Mid-Fielders and Forwards do not have very high growth rates. So, they don’t need excess capital to grow which may result in a good dividend pay out to investors. These set of companies provide stability to the portfolio by protecting the downside of the portfolio over the long run.