If asked to identify a stock that has achieved over a 500% total return, compounded earnings at an annualized growth rate of 10% or greater, traded at an earnings multiple of less than 15x, and maintained or raised its dividend for over 20 consecutive years, what names come to mind?

If you answered Microsoft, Apple, Alphabet, or Nvidia, you would only be partially correct. While each of these gilded tech names met at least one of those criteria, none satisfied all four metrics at the same time.

The companies that did were relatively boring, unglamorous staples and insurance names, like Kroger and Allstate. These businesses were not only durable in difficult markets but compounded through them, generating outstanding long-term returns for some investors while others seemed distracted by the market’s loudest theme.

Today, that distraction is AI. When one narrative becomes the market’s primary engine—with headlines, capital flows, valuations, and index weights all pointing in the same direction—we have found that opportunity often builds quietly where most investors are ignoring. Today, we believe the classically defensive areas within developed markets not only offer the potential for steady returns but also present a true “coiled spring” setup.

AN UNDERAPPRECIATED OPPORTUNITY

A broad swath of defensive stocks is currently trading near multi-decade lows on key relative measures, notably their relative forward P/E and weight in the S&P 500. Meanwhile, index concentration has surged: today roughly half of the S&P 500’s market cap is tied to AI-related exposure, and the “Mag 7” alone represent approximately 35% of the index. This rally, supercharged since ChatGPT’s release in November 2022, has reshaped the index and widened the valuation gap versus defensives to create an opportunity we rarely see.

To characterize our view of a coiled spring setup, one helpful theoretical lens grounded in nearly 40 years of history is the relationship between defensives’ share of the S&P 500 and their coincident relative performance. Empirically, every 1% change in defensives’ share in the S&P 500 has tended to align with roughly 10% of relative performance. With defensives today representing about 17% of the S&P 500 versus a long-term average of 26%, that 9% gap implies a potential relative upside of 90% if the composition were to revert to the long-term average. While we do not underwrite that outcome, we view it as optionality on top of returns we believe are already achievable and attractive on fundamentals alone.

To be clear, we never buy anything on the basis of mean reversion. Our process is rooted in assessing business quality, visibility, and durability of earnings, and what we view as a reasonable path for generating high-single-digit to low-double-digit returns. That said, when gaps get this wide, we believe it is impossible to ignore that any normalization has the potential to be additive—and markets rarely normalize “politely.”

While the market is captivated by flashy technology, we are more galvanized than ever about staying true to our philosophy: high-quality businesses with durable earnings power at defensible valuations. In our view, the opportunity today is not chasing what has already been bid up, it is about owning what meets our minimum hurdle rate on fundamentals and can rebound sharply when capital rotates, concentration breaks, and valuations mean-revert. The current dispersion between defensives and the broader market does not just suggest upside; it suggests the potential for a swift, powerful snapback when the story changes, in our opinion.

CONSISTENCY BEATS TRENDY 

Defensive stocks offer steady growth, high visibility, and attractive returns through dividends and buybacks, making them resilient investments often overlooked by the market.

While their growth may not match the rapid revenue or earnings expansion seen in companies like Nvidia or early-stage software businesses, it is consistent and almost formulaic. For instance, utilities like Duke Energy project long-term EPS growth of 5% to 7% through 2029 coupled with a ~4% dividend yield, delivering a total return potential of around 9% to 11% with minimal valuation risk, in our view.¹

But in momentum-heavy markets, steady and visible cash flows do not capture attention the way big promises of future profitability do. This is further underscored by the fact that AI narratives have been driving the market frenzy. Semiconductors, cloud, and data center infrastructure businesses—among the most cyclical industries in the world—have become irresistible magnets for capital, as we have discussed at length in our Dotcom on Steroids series.² Investors seem to be willfully ignoring their inherent cyclicality, chasing businesses trading at sky-high valuations on peak margins tied to AI trends with little regard for near-term profitability. Many names in these industries are now ‘priced for perfection,’ in our opinion, leaving no margin for error and setting the stage for significant disappointment when the inevitable CapEx spending slowdown arrives. We feel the disregard for these businesses’ historical boom-and-bust cycles is nothing short of reckless. But, as history shows, narrative-driven momentum can keep markets disconnected from fundamentals far longer than logic suggests, as seen in past bubbles including the dotcom era of the 1990s.

The dotcom bubble reached its height in early 2000, a time when US tech stock valuations were soaring, relying heavily on the promise of profitability rather than hard earnings. These valuations were fueled by a belief in the transformative power of the internet and favorable monetary conditions but overlooked traditional, yet frankly quite basic, fundamentals.

NAMES THAT BRING THIS OPPORTUNITY TO LIFE 

While we are not valuation-driven investors, we do believe valuations matter, particularly over the three- to five-year investment horizon we target, especially when they trade at extremes as they do today.

As we touched on earlier, defensive sectors like US utilities have been showing faster, more consistent, and more predictable earnings growth than they have in years. Yet, surprisingly, utilities are still trading at a meaningful discount to the S&P 500. This is despite delivering earnings growth that is historically in line with the broader index, in addition to boasting a solid ~3% dividend yield. We think this means that utilities should continue to meet our objective of compounding capital at a high-single-digit to low-double-digit rate, driven by earnings and dividends alone, without meaningful valuation compression risks.

In the same vein, consumer staples also look more attractive than they have in quite some time. Here is why: during COVID, these companies gained favor as consumer behavior shifted toward spending on essentials like food-at-home and other goods to a level that came to dominate consumers’ wallet share for several years—while discretionary spending, largely tied to services, took a back seat. But when that trend started to unwind, it created years of relative underperformance for staples compared to the index.

Staples Wallet Share Has Normalized

Seeing this underperformance, many investors may have soured on staples, perhaps assuming there is something fundamentally wrong with the sector. The loudest critics point to structural challenges like shifting demographics, the rise of private-label brands, or even GLP-1s. All valid trends at the margin, but we think the real story is much simpler: it is about cyclical normalization. In our view, select high-quality staples businesses have returned to high-single digit EPS growth and are now leaner, more focused, and positioned to thrive. Take Kroger, now trading at an approximate 12x EPS for fiscal year 2027, where we see a long-term earnings growth opportunity of 6% to 7% paired with a consistent dividend yield of 2.5%.

Kroger, in our view, is priced well below its fair value. It is benefiting from a low multiple, accelerating store openings in fast-growing markets, and new leadership which we believe is poised to guide the company successfully into the future.

We think insurance names also offer an attractive risk-reward profile, including stocks like traditionally ‘boring’ property and casualty insurers such as Allstate. Over the past five years, Allstate delivered an annualized total return of around 17%, beating the S&P 500’s 14% return over the same period. What is even more striking is that Allstate pulled off this outperformance while its valuation multiples declined from nearly a 17x peak back in 2023 to about 8x by early 2026—even in the middle of an AI-driven bull market.

‘Boring’ Allstate beats ‘Hyped’ S&P 500

Allstate Corp vs S&P 500 total return last 5 years

To put it in pragmatic terms: ask a group of people to compare the perceived value of ChatGPT to auto insurance. While most people pay for and would pay more for auto insurance—even if rates increase or they lose their job—very few pay for ChatGPT, and far fewer would pay more if its price went up.⁴ That willingness to pay, especially in tougher conditions, is the quiet edge we feel that ‘boring’ insurers offer in markets as topsy-turvy as this.

DEFENSIVES AT MULTI-DECADE LOWS EVEN IN EUROPE

This resilience and adaptability are why we remain confident in staples, even amid concerns about the potential impact of GLP-1s. One may argue that these concerns are already priced in, given valuations are at a substantial discount compared to the broader market and their historical levels. While the claim that GLP-1s could impact consumer staples may hold some truth, in our view the market is being overly punitive and is ignoring these companies’ proven resilience and adaptability. Staples giants like Unilever and Danone have faced shifting trends before—from the backlash against sugary drinks to the rise of health-conscious eating—and emerged stronger by innovating. We think their massive advertising and innovation budgets, retailer partnerships, and control over prime shelf space give them a competitive edge over would-be new entrants. If GLP-1s shift consumption toward high-protein or functional foods, we believe companies like Danone, with expertise in dairy and nutrition, are well positioned to capitalize. And when indulgent categories like soda faced scrutiny, staples leaders reinvented with zero-sugar options and creative packaging, reigniting growth.

To be clear, we have also made the opposite call on staples when the risk-reward was unfavorable. In the summer of 2016, we wrote a paper titled “Do Multiples Matter?” on the sector’s valuation risks as we felt investors were overpaying for perceived safety near the start of what became a decade-long period of underperformance. This matters because it underscores that we are not dogmatic: today’s setup looks the opposite to us, with defensives de-rated to levels that make the asymmetry more compelling.