Definition of Defensive Stock

What is the definition of a "defensive stock"? What is an example of a defensive stock?

In the most recent dictionary entry, we defined the term "cyclical stock".

A cyclical stock is a stock that does better when the economy is expanding, and worse when the economy is contracting.

An example of a cyclical company would be a car manufacturer.

Now, "defensive stocks" hold up much better when the economy is slowing or in a full-blown recession.

Why?

"Defensive stocks" are companies that don't experience a noticeable downtick in revenues when the economy goes south.

Food companies. Tobacco companies. Health care companies.

Smokers are still going to buy cigarettes in a recession. People are still going to buy dinner at McDonald's in a depression.

These are "defensive" companies, meaning - if you want to protect your portfolio in a recession, you will turn to "defensive stocks" such as McDonald's or Philip Morris.

Cyclical companies, on the other hand, will perform (by definition) poorly during times of economic distress.

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