Behavior of counter-cyclical defensive stocks in the event of a stock market crash

[YaPasPhoto]

Good morning,

I would like to know how a countercyclical defensive stock traditionally behaves in the event of a real stock market plunge (major crash).

I will take as an example the registered share of Mikron Group.
It is a Swiss small cap. Its sector of activity is machine tools and automation.
Its main markets are the automotive industry, the pharmaceutical industry and medical equipment, as well as the writing instruments sector.
The company has been profitable in recent years, but due to the strong franc and fierce competition, its net profit margin remains low and its P/E is high.
The dividend is also low.
The price-to-book ratio is particularly low at 0.66.
This title appears to me to be relatively illiquid.

What I observe is that this company's stock has a low Beta; it generally reacts less strongly to stock market surges, both upwards and downwards.
In the short and medium term, it seems counter-cyclical to me. When the Swiss stock market makes a good 2% rise, this stock often loses value. Conversely, when there is a sudden fall of 2%, this stock gains a little; roughly I would say around 0.7%.
In my opinion, speculators abandon this stock when they anticipate a more lucrative rise in another stock. On the other hand, this stock seems to serve as a shock absorber during temporary declines in the Swiss stock market.

As the stock markets have been moving in a bullish mode for quite some time, to the point that stocks are reaching stratospheric valuations, the behavior of this stock is currently very disappointing compared to other stocks.

My question is how such a countercyclical stock will behave if the stock markets really plummet, as they did during the 2008 financial crisis.
In 2008, Mikron's share price also fell, but its valuation seemed significantly higher.

In the event of a new crisis, is there a risk that such a title will be swept up in the storm, particularly because of its exposure to industrial demand, or is it, on the contrary, relatively safe due to its low price-to-book ratio?

THANKS

[Jerome]

Hi

Defensive stocks are supposed to perform better in a market downturn.

Indeed this stock has a low beta, however I would not say that it is what would come to mind first when talking about defensive stock. We are still in an industrial and techno sector. And then the PE ratio is really very high, while the dividends are miserable and decreasing in addition. A low PE and an average and increasing dividend is better to play a defensive role.

On the other hand, you are right to point out that the title offers a low P/B, and to that we must also add a low P/S. This is clearly better. The debt is also low, which avoids playing on a leverage effect. The P/FCF is also reasonable.

In short, profits have fallen since 2012, but the price has remained the same, so the PE has risen. It does indeed seem that the book value is playing its role as a shock absorber.

In the end, look at the graph over 30 years… it’s not really defensive. But it’s hardly moved since 2002. Maybe it won’t go down anymore, but maybe it’ll stay flat for another 10 years…

[dividinde]

Mikron is absolutely not a defensive company; on the contrary, it is one of the most cyclical stocks on the Swiss stock market.
It is optically cheap because its share price is low and its PBR is less than 1, but its dismal fundamentals explain this valuation. The net profit margin and the ROE have almost never exceeded 1%…
By purchasing such shares you must be aware that you are speculating at 100% and that this has nothing to do with an investment.
Tornos has seen its market capitalization melt by 97.4% since its launch 30 years ago…
At this level I still prefer to go to the casino, you will at least see cleavage and not cleavage...

[dividinde]

To answer your first question: "I would like to know how a countercyclical defensive stock traditionally behaves in the event of a real stock market plunge (major crash)."

Just compare Nestlé's chart with Rieter's during the last crisis.

Three years after the subprime crisis, Nestlé had surpassed its previous high of 2007.

Ten years after the same crisis, Rieter is still worth less than half of his 2007 value.

A picture is worth 1000 words.

[Jerome]

I would add that a strategy based on low PBs is not bad in itself, on the contrary, but you have to be aware that it implies high volatility. Mikron denies this for now but you never know...

So if you are looking for something defensive, choose stocks that have been paying a growing dividend for many years, at least 2%, with a payout ratio of less than 70%. You will see that this will automatically eliminate almost all cyclicals!

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