It’s been three years (and a month) since I launched Financial-Engineering.net in August 2022 to share my unfiltered thoughts on stocks, their valuations, risks like dividend cuts, and my best ideas that survive my rigorous research process. In past anniversary posts, I’ve offered food-for-thought insights. Today, I’m cracking the myth of “safe” stocks.
Summary and key takeaways from today’s Weekly
– There seems to be a widespread misconception and wrong belief about what “defensive” stocks are.
– Little surprisingly, many of these “defensive”, and thus “low-risk” stocks have plummeted.
– It is important not to confuse risk and defensiveness.
Factually, I got active in stock markets almost 15 years ago. But only three years ago did I finally set up and launch my own platform.
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Back to the core of today’s episode, the matrix of investing.
Who doesn’t know the tip to invest only in what’s “safe”. But what is safe? Haven’t we seen many “safe” stocks flushing down the toilet, leaving many observers confused?
Let’s break this illusion.
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both as per 03 September 2025 market close – since August 2022
Safe-Stock Illusions, Risks and Valuation Truths
My personal investing style is likely best described as “pursuing calculated risks”.
What I am reluctant to do is to distinguish between “defensive” and “risky” like is often the prevailing modus operandi. Investing is never without risks, the same as life in general is never without risks. Otherwise, keep lying in bed when you wake up – but even this is risky as your muscles will degenerate, causing other types of problems.
What I demand from everybody who is serious about investing in stocks is to develop a mindset where risks are not put under the carpet, but understood properly. It is then up to everybody on their personal basis to decide what is too risky, and what is not. But it’s an illusion that there’s something like risky and risk-free stocks. Or “defensive”.
We have seen many “defensive” stocks collapsing – we’ll pick a few examples below.
Don’t get me wrong, it is not my goal to lure in investors into my memberships who prefer consumer staples or tobacco stocks for their dividends into one of my biotech, oil or gold mining stock picks. Generally, I am open to almost all sectors and stock setups, given I understand the case, and there’s sufficient value to be extracted.
Believe it or not, I have even presented a consumer staples idea to my members in July 2025.
And no, it is not trading at 25x PE, with a balance sheet full of debt, a declining core business, and a minuscule dividend yielding 2%.
This company is a winner of the cost-of-living crisis, with a clearly-defined catalyst on the horizon, ready to materialize in a couple of weeks.
After you’ve read this report, you will understand why I prefer such setups, instead of chasing the typical suspects.
When I come across ideas everyone knows, and which are priced accordingly, I fold.
What else shall I do, buy, and even worse, write about overpriced stuff, just because everyone else does? With the thesis that the stock must go higher because it has a strong run as the main investment thesis? Or because it must have a great future because everyone and their neighbor think so? Honestly, even if the business will have a great future, who says that this is not already priced into the stock?
In fact, most of the stocks I check, are not interesting. Some not at all, others not at prevailing prices. What is sure, I am usually not interest to blindly join the herd.
This might create the impression that my approach is too risky.
Is it?
To debunk this myth, I have no case open with those typical AI stocks. But I have a pick that instantly comes to my mind which has implemented AI into their service. The difference: the valuation is not excessive, expectations are low, the company is highly profitable with a proven business case, and its balance sheet has more cash in relation to its market cap than is the case for any of the big names. And it’s founder-led.
I’d say the downside is very, very low on the premise the business continues to develop as it currently does (or even better). I cannot say the same about many hyped-up names. It is fine to have unrealized gains. But most of these people won’t cash out and take the elevator down, when the music stops playing.
This is not a question of if, but of when.
This example should make it clear how I distinguish between defensive and risky picks.
What unfortunately many people either don’t understand, or just blatantly ignore, is that valuation is a type of risk – unfortunately, most investors don’t care.
Besides my known negative expectations regarding AI, we can cut out complexity and pull out easier examples.
Case in point, what about Walmart (ISIN: US9311421039, Ticker: WMT). Why the heck is the world’s largest supermarket chain trading at a PE ratio of 38x as if this were a high-growth tech stock, when it is growing in the single-digits of which most is achieved through price hikes?
The dividend yields less than 1%, and free cash flow is even not growing at all due to massively ramped up investments into e-commerce, AI, and third-party marketplaces.
This stock could easily drop by a third and it still would not be dirt-cheap.
At the same time, the upside case is – an even higher multiple? Expectations sooner or later reach a point where they cannot be met anymore, leading to sharp corrections. The better outcome would be a lengthy sideways move with no gains. Dead money. Is this really better? Sure it is, but it likewise misses the initial goal of achieving returns. And zero percent is still a loss in real terms!
The stock could rise further, yes.
But what are the odds, do you like the risk and reward? This reads more like a high-risk investment, doesn’t it? Not from the business, but from the valuation perspective.
I think you get my message.
Leaving out the valuation component creates this illusion of “safe” or “defensive” stocks where proverbially nothing could go wrong. Walmart is likely the epitome of a proven company with a defensive business model and competitive advantages through its scale, paired with practically guaranteed demand for everyday essentials.
Until the wheels fall off the bus at some point.
I think I have discussed most of the now following cases in previous Weeklies. Who wasn’t surprised (raising my hand) that such pretend no-brainer investments see their stocks collapse?
Let the charts speak.
I do not want to judge whether these are all defensive stocks.
Most likely have relatively conservative and proven businesses, either with frequent demand and / or popular brands – I think that is a terminology we can agree too.
But this doesn’t mean there cannot be any operational or competitive issues.
Many if not most of them, have been seen as proven, thus safe and defensive ideas to put one foot in the door of stock markets. And by the way, even though not today’s topic, a broadly “diversified” basket of all the names above would not have spared the investor from suffering. A basket full of garbage does not make the basket look better – or safer. I wrote about this topic on other occasions (see here, here and here).
In the public perception, most of them clearly have been seen as such – pretend low-risk picks. I have often seen comments with buy-the-dip calls, followed by “stupid Mr. Market does not understand”, etc.
It is barely a coincidence that such names fell from lofty expectations.
They were often priced for perfection, sometimes even beyond that. Add high debt, patent expirations for key drugs, collapsing growth and / or margins which could have been spotted in advance from the financial releases. Even if not at the top of glory, such developments don’t occur overnight. There are often many red flags recognizable early enough to avoid the truly big damage.
Whether a meaningful growth slowdown, margins being under pressure, cash flow diverging from reported earnings, constantly higher and higher debt, paying a dividend despite not enough free cash flow – this is not rocket science.
To tell you what kind of setup appeals to me, there’s no one-size-fits-all answer.
I am trying to understand each underlying case, assess the potential and its risks, value the business, look for red flags. If my head AND my gut do not stop me, I am getting serious. From my view, it makes more sense to look for cases with relatively low expectations, but high potential.
To give you a concrete example:
United Therapeutics (ISIN: US91307C1027, Ticker: UTHR), one of my member-exclusive biotech ideas with an asymmetrical setup, published a readout from an ongoing clinical trial.
Its drug, which is already being used for two indications, has shown efficacy now in a related, underserved disease.
If approved, a bigger market than potentially the entire current business is waiting – with practically no serious competition as approved drugs come with side effects.
UTHR has a huge net cash position (30% of its market cap, still, after the pop), is generating tons of cash flow, and has multiple arrows in its quiver still, beyond this particular trial (which actually consists of two trials). Even the emerging competition does not seem to be able to stop it, as management is trying to diversify away into bigger, more underserved niches.
All this, while the valuation is absurdly low for what it offers.
But yes, let’s buy Pfizer (ISIN: US7170811035, Ticker: PFE) because its stock has dropped, and for its juicy dividend, while its key patents expire or already have so. Not to mention it’s almost 50 bn. USD in net debt.
The stock of UTHR out of the sudden on Tuesday jumped by more than 30% (pre-market almost 50%), and made a new all-time high. We are not talking about a small fish, as UTHR before the release had a market cap of ~13 bn. USD.
But the two biotechs from the charts above that are creeping near their lows are likely better ideas due to their “proven history”.
The market is not nostalgic and does not care about the history.
The market cares about the future.
Conclusion
There seems to be a widespread misconception and wrong belief about what “defensive” stocks are.
Little surprisingly, many of these “defensive”, and thus “low-risk” stocks have plummeted.
It is important not to confuse risk and defensiveness.
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