After falling about 7% in two weeks, the FTSE 100 seems to have steadied for now. But my sums suggest this decline may have knocked nearly £150bn off the value of the largest companies in the UK.
Market dips don’t stop me buying shares. Indeed, I like to follow Warren Buffett’s advice and “be greedy when others are fearful”, picking up potential bargains for my portfolio.
However, conditions could well get worse before they get better. We simply don’t know. So to try and protect my portfolio, I’ve been hunting for stocks that I believe will provide some defensive protection. I’ve found two potential buys among the mid-sized companies of the FTSE 250, including one stock I already own.
Profit from volatility
Some professional investors like to hedge their portfolios with index trades that deliver profits when the market falls. The problem is that this can be costly if the market doesn’t fall. Indeed, for most of us, I think this approach is too complex, risky and expensive.
What I like to do instead is to own shares in businesses that can profit from volatile markets. At the top of my list in this regard is financial trading firm IG Group Holdings (LSE: IGG).
This £2.1bn FTSE 250 business allows investors to trade contracts for difference and spread-bet across a wide range of markets. It’s the largest player in this sector and is widely regarded as the best operator, with a lot of high-value professional clients.
Dull, flat markets are the worst thing for IG’s profits, as they don’t generate suitable conditions for the firm’s clients to trade. But when markets get choppy and uncertain, IG’s profits can rise sharply. It doesn’t much matter whether the market is going up or down — the important thing is that it’s moving.
40% profit margins
I wouldn’t want to invest in a stock like this if it didn’t have strong financial foundations. Fortunately, that’s not a concern here. IG has a cash-rich balance sheet and reported an operating profit margin of 39% last year.
Growth has been hit by new regulations introduced last August. These have left the shares trading on 14 times forecast earnings, with a 7.7% dividend yield. However, profits are expected to return to growth next year. I feel that this could be a good time to buy into this well-established business.
Sweeter than sugar
My next defensive portfolio pick couldn’t be more different. Tate & Lyle (LSE: TATE) is a well-known brand name for sugar. However, these days the business is focused on sweeteners and specialist ingredients used by food manufacturers.
I’m attracted to the long and stable track record of this business, plus the defensive nature of its products. Tate & Lyle’s dividend has not been cut for 18 years. Although it’s been a slow grower, I’m attracted to the firm’s stable cash flows and reliable performance.
TATE shares were strong performers earlier this year, but have now given up some of their gains, falling back below 700p. This has left the stock trading on about 13 times forecast earnings, with a prospective dividend yield of 4.3%.
I believe this could be a good entry point. These shares are on my watch list as a possible buy over the coming weeks.
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Roland Head owns shares of IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019