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When 'Defensive' Rhymes With 'Expensive' By Spencer Jakab

Stocks are rising around the world and the dollar is stronger after a federal trade court ruled that President Trump had no legal authority to impose the majority of tariffs announced or threatened since he took office. Upbeat results from AI chip maker Nvidia also brightened the market's mood.

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"If you raise the effing hot dog, I will kill you ."

The threat Costco's founder Jim Sinegal made to its CEO back in 1985 has become the stuff of corporate legend . Incredibly, the retailer's hot dog and soda combo is still $1.50, which is about the price of a single share in its initial public offering that year.

Today, adjusted for stock splits, the stock has risen to a cool $1,000-a testament to superb management and one of the greatest business models of all time. Costco, which reports quarterly results this afternoon, is a rare port in economic storms in its industry. But, unlike its customers, investors might have lost their eye for a bargain.

Defensive stocks have great appeal at times like these and Costco has the third-highest weighting in index provider MSCI's USA Defensive Sectors Index . Pharmaceutical company Eli Lilly is number one. Such companies' earnings tend to hold up well during economic turbulence. Costco's results should demonstrate that again; its fairly well-off clientele probably shrugged off the strain from tariff chaos.

Just don't confuse buying something with "defensive" on the label to the value-investing concept of "margin of safety." Costco and Lilly, with the latter's dominant position in weight-loss drugs, both fetch nearly 60 times trailing earnings-well above where they have traded historically.

One thing Costco has going for it is a famous fan who once said he would never sell the stock: Warren Buffett's late business partner Charlie Munger. Yet even he winced at the multiple , which was just two-thirds as high when he praised it.

"Except for that, it's a perfect damn company," he said.

Not selling isn't the same as buying more. Owning a company with a solid franchise lowers the odds of a sharp business decline, but it also makes sense to own a basket of less-stable or more-cyclical companies when you're compensated for the risk.

MSCI's defensive index rose modestly in 2022 when its corresponding MSCI USA index fell by almost 20%. It also held up well during the "Liberation Day" swoon this April. In-between, though, the defensive index has lagged. In the 10 years through April, it had an annualized return of 7% compared with 11.7% for the broader group.

A similar problem affects so-called low-beta stocks. Beta is a measure of how volatile a stock is relative to the market and academics have made it synonymous with risk. That isn't quite true, though. Risk is losing money permanently, not temporarily.

Investors are better off picking stocks trading cheaply on measures such as cash flow or earnings-the hot dogs of the investing world. Costco is priced like prime rib now.

Stocks I'm Watching

Just don't do it. Stocks such as Nike and Apple rallied before the bell on a court's decision that President Trump lacked the authority to have introduced most of his tariffs.

European stocks exposed to tariffs because of their U.S. sales and global sourcing networks rose. Sportswear brand Adidas and luxury-goods conglomerate Kering were among the big names gaining ground. Car stocks such as Stellantis also rose.

Nvidia : The AI chip maker's results showed sales continued to boom, even with the company effectively shut out of China. Shares rose rose 5% premarket, as quarterly revenue surged to a record $44 billion .

Stocks riding the data-center boom, such as server supplier Super Micro and cooling-equipment maker Vertiv , rose premarket after Nvidia's results.

Paramount Global : The company has in recent days offered $15 million to settle President Trump's lawsuit against CBS News, but his team wants more, The Wall Street Journal reported .

Salesforce : Shares in the cloud software pioneer rose ahead of the open after it posted better-than-expected earnings and raised its annual sales outlook .

Best Buy , Kohl's , Foot Locker : The retailers are all due to post earnings Thursday morning.

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About Me

My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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