Happy Saturday afternoon to everyone on The Street.

And, welcome back to our new deep dive edition, in which we’ll double-click on a sector, metric, or other investing-related topic we feel isn’t getting the shine it deserves.

The broader market has been on the attack lately. But for investors who want to stay above the fray, the best offense may be a good defense.

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Boom or Bust?

The AI boom is the most common theme discussed by market observers lately — but also the most frustrating.

There have been plenty of benefits to the excitement around the emerging technology. Tech giants are soaring to record highs. They’ve taken all three major indexes with them. More major companies are announcing attempts to capitalize on the hype every day.

But for each of these empirical boons for some investors, there are looming unknowns for others. Which stocks will benefit next? How will regulatory efforts shake out? Is the wave sustainable, or just a bubble waiting to burst?

Successfully predicting the answer to those questions could well mean major gains for some investors. But it’s a risky endeavor, and others may prefer to sit it out until the space takes on a more predictable shape. Even those who are in on the AI boom would be wise to not go all in, as diversification remains a fundamental component of most successful portfolios.

With all that in mind, let’s shift focus from one of the most exciting new industries to one of the most reliable old ones: the consumer defensive sector.

Protect Your Portfolio

Consumer defensive stocks offer stability and resilience in an uncertain environment, where gains are unevenly distributed and macro tail risks linger.

These companies manufacture essential goods like food, beverages, and household products — items that maintain demand regardless of economic fluctuations.

Some would call consumer defensive stocks “boring” — and they’d have data to back it up. From Q4 2022 (when ChatGPT first launched) to Q2 2024, the Morningstar U.S. Market Index performed roughly twice as well as the Morningstar U.S. Consumer Defensive Index.

But while the sector’s returns may be lackluster in bull markets, it is historically resilient in bear markets, too. The same often can’t be said for “growth” stocks.

Morningstar (MORN) notes that, after lagging behind the broader market for more than a year, now might be the time to give the space another look. Earlier this month, the firm shared three funds that have recently been weighed down by their exposure to defensive names — but just might be poised for a comeback.

Fund Focus

First Eagle Overseas (SGOVX) is a fund focused on long-term growth via non-U.S. equities, offering American investors exposure beyond the localized market forces impacting companies stateside.

It prioritizes firms with robust margins of safety, stable earnings, and strong balance sheets or valuable assets. To further mitigate volatility, the managers also allocate to gold bullion when equity opportunities are limited.

Like most defensive stocks, the fund’s portfolio has underperformed the market rally starting in late 2022. But in the nine months prior, as inflation soared to multidecade peaks, First Eagle Overseas performed in the top 10% of all funds.

Morningstar assigns the fund a Bronze rating, indicating notable advantages across several pillars, and signaling expected positive net-of-fee alpha.

The firm also named AMG River Road Dividend All Cap Value (ARDEX) and American Century Focused Large Cap Value (ALVIX) as defensively-focused funds that have underperformed in the short-term, but have a disciplined approach that could pay off in the long run.

Goldman Sachs (GS) recently noted that major hedge funds are increasingly turning to defensive names in this uncertain environment. The funds highlighted by Morningstar have a headstart on that trend, and may be worthy of consideration by individual investors looking to jump on the bandwagon.

TOGETHER WITH THE MOTLEY FOOL

You missed Amazon. You don't have to again.

Amazon, once a small online bookstore, grew into a global behemoth, transforming industries along the way. Now, imagine yourself at the forefront of the next revolution: AI. In The Motley Fool's latest report, uncover the parallels between Amazon's early trajectory and the current AI revolution. Experts predict this AI company could surpass Amazon's success with market caps nine times larger. Yep, you read that right. Don't let history repeat itself without you. Sign up for Motley Fool Stock Advisor to access the exclusive report.

Sign up today