Defensive names like H.J. Heinz (HNZ) make a great deal of sense in the currently turbulent market environment. While the stock market as measured by the S&P 500 is down nearly -7% since early April, Heinz is up over +4% over the same time period. This is due to the fact that more defensive names like Heinz often outperform during this stage of the cycle as investors have greater confidence in the consistency of operating performance from a company that sells ketchup and beans versus other firms in the market.
Despite these advantages, the opportunity was taken to lock in gains and exit positions in Heinz on Friday (5/11/12) for the following reasons.
First, positions in Heinz were first established at the market lows last summer on August 9, 2011. And it has generated strong results in the months since, having returned +15%.
Second, defensive stocks like Heinz as well as those in the Consumer Staples, Health Care and Utilities are beginning to approach the later stages of their own leadership phase in the stock market. Defensive stocks assumed market leadership back in March, and while they may continue to outperform on a relative basis during the summer, they may begin to struggle in their own right on an absolute basis if the broader market correction continues to accelerate.
Lastly, Heinz is currently trading at the top end of its range, suggesting now is a particularly good time to lock in gains. In breaking out decisively above $54 per share to reach new highs, it is now overbought with an Relative Strength Index (RSI) over 70. The last several instances Heinz approached or exceeded an RSI reading of 70, the stock subsequently corrected between -5% to -13%.
Looking ahead, Heinz continues to represent an ideal core holding for equity portfolios. Thus, monitoring for potential reentry points on any meaningful pullback is worthwhile. Ideal points to watch for consideration include the 200-day moving average (red line in chart above) and the 300-day moving average (green line).