Pick the right defensive firm to protect your stock portfolio

DESPITE analysts&rsquo; continued calls for a much-needed pullback in global equity markets, the FTSE 100 has stubbornly risen to the 5,200 mark. And if you believe that equities are due a correction, then you might want to bulk up your portfolio with a few defensive stocks as they tend to remain relatively stable, even in tough trading conditions. <br /><br />But out of the defensive stocks on offer, which ones provide investors with the most opportunity? Companies in both the healthcare and the consumer staples sectors have so far underperformed the wider market by over 25 per cent since the market trough and are therefore looking relatively cheap at the moment. <br /><br />But analysts at Bernstein Research think that investors would do better to position themselves in the healthcare sector (of which pharmaceutical companies comprise 67 per cent) rather than go for consumer staples like food producers. <br /><br />And according to the latest global fund managers&rsquo; survey from Bank of America-Merrill Lynch, UK fund managers would seem to agree. Their portfolios are about 10 per cent overweight on healthcare and pharma compared to almost 20 per cent underweight on food and beverages.<br /><br />Bernstein senior analyst Adam Parker argues that pharma stocks are more attractively valued as the sector&rsquo;s price-to-forward earnings (p/e) is near a historical low compared to the p/e for staples. Furthermore, pharmaceutical stocks are, at the moment, on a slightly lower beta value than consumer staples, making them a better defence against a pullback in the market. For example, GlaxoSmithKline currently has a beta of 0.37 and AstraZeneca is on 0.35. In comparison, Unilever has a beta of 0.39 and Premier Foods is on 1.22. If a stock&rsquo;s beta is below one, then it will fluctuate less than the market.<br /><br />Parker also thinks that pharma companies are more likely to achieve their forecasts than staples. And particularly important in the wake of last year&rsquo;s financial crisis is balance sheet strength. <br /><br />Parker says: &ldquo;While both pharmaceuticals and consumer staples exhibit above average balance sheets, pharma companies generally have less debt and more cash.&rdquo;<br /><br />When it comes to adding defensives, you should look for stocks that provide a constant dividend and stable earnings in spite of the wider market. The low beta of the healthcare sector, and the expectations that its companies will achieve their estimates, make them a good defensive play.