The new defensives in focus

Our 'new defensive' criteria

■ They sell little and lots of low value items, maybe something seen as a cheap treat.

■ What they sell could be seen as a cheaper alternative to a more expensive item – although the flip-side is that when the economy picks up, customers switch back to the more premium item.

■ What they sell is non-discretionary, in other words it's not something their customers can cut back on when household finances are stretched.

■ There are few viable product alternatives or suppliers.

■ The firm operates in a secular growth market, even if its wider industry is prone to cyclical ups and downs.

■ A high proportion of revenues are recurring in nature, and these sales are contracted several years into the future.

Domino's Pizza UK (DOM, 420p)

We first suggested buying shares in Domino's Pizza UK back in 2004, when they traded on Aim and were 216p each, and the dough's been rising ever since. Share splits and buy-backs have, in fact, masked the performance – they've actually returned over 500 per cent in the six-year period, including an 18 per cent gain since we last tipped them in February, making them the standout performer in the travel & leisure sector.

No small wonder. Sales and profit growth have been spectacular, and its latest half-year results showed an acceleration of growth, even as other restaurant groups struggle to restore trading to pre-recession levels. The key to Domino's success has been its ability to offer attractively priced and highly convenient food, which has underpinned massive expansion across the UK over the past 25 years and saw sales and profits climb 24 and 30 per cent respectively in its latest half year. It has outlined plans which would comfortably double the number of outlets it operates to 1,200 over the next decade, while efficiency gains and operational gearing should see profits continue to head steadily upwards.

Eaga (EAGA, 120p)

Outsourcers may be under the spotlight as the government works out where it can slash spending, but one firm seems to have found a niche that offers shelter from the ill winds blowing through the sector. Eaga styles itself as a green support services firm, and has won a raft of contracts that the government hopes will help the UK to meet mandated European emissions targets. These include the installation of energy saving measures in domestic properties under the Community Energy Savings Programme, which, importantly, is funded by utilities rather than the government. It expects total revenues from the scheme to hit £350m by 2012, and is also seeing encouraging signs from involvement in community solar micro-generation projects. The funding structure means Eaga is less at risk from direct government spending cuts, and energy secretary Chris Huhne has said that investment in low-carbon technologies will remain at the core of government energy policy.

Halfords (HLF, 497p)

Retail is a notoriously cyclical industry, being closely linked to consumer confidence and the general economic well-being of the country. But some retailers are more cyclical than others, sailing through the recession with barely a scratch. In Halfords' case, it's been more riding than sailing – bikes have proved its saviour, as growing health and environmental awareness has persuaded more and more people to switch from four to two wheels. Its acquisition of Nationwide Autocentres in February adds another defensive string to its bow. Car repair is a critical and absolutely non-discretionary component of household spending, with the market estimated to be worth £9bn a year. Halfords believes there is huge latent demand for high-quality independent mechanics at a lower price than dealer servicing, and plans to build on the position with further Halfords branded repair centres. However, we should look to Mothercare for a cautionary tale of defensive growth – although it's often been said that spending on kids would be the last area parents would cut, UK growth has slowed markedly in the last year.

Cranswick (CWK, 863p)

While half the nation may be feeding themselves with takeaway pizza during the recession, the other half are also looking for ways to save money but without too much culinary compromise. That means, with pork prices considerably lower than other proteins, it's out with the sirloin steak and in with the posh bangers – great news for pork producer Cranswick, which, with families apparently eating around a stone of sausages a year, has seen business boom during the downturn. It supplies all major supermarkets with much of its premium own-label sausages, bacon and fresh pork, as well as manufacturing leading licensed brands such as Jamie Oliver and the Black Farmer. So, while the rising demand for private label goods has put formerly defensive branded producers under pressure, Cranswick enjoys the best of both worlds. Growth has been so rapid that the group is investing in a major capacity expansion of its sausage and bacon processing facilities, which are now running at full tilt after respective 23 and 61 per cent first-half sales increases. It's also worth taking a look at Devro, which sells collagen-based casings for lower quality sausages and hot dogs, and is seeing business boom as emerging economies increase the level of proteins in their diets.

Croda International (CRDA, 1138p)

Because chemical producers are often heavily exposed to manufacturing, they tend to be highly cyclical. So why on earth would we want chemicals specialist Croda on our list of defensive growth shares? The answer is, Omega 3s, which is one of the group's key product lines. The fabulous fatty acids are all the rage for mums trying to give their kids a healthy head start, with research suggesting that they increase brain and immune system health as well as resistance to cancer and cardiovascular disease – the sales of the speciality chemical helped its consumer care business increase profits by a quarter in the first six months of this year, and Croda estimates that the Omega 3 (or lipids) market is growing at between 15 and 25 per cent a year. But there is much more to Croda than this – it also sells ingredients for skin-care products, tapping into what it describes as the "megatrends of vanity and ageing", and the sale of its low-margin bulk fatty acids business should help it continue the steady EPS and dividend growth that it's exhibited over the past five years.

Ultra Electronics (ULE, 1,544p)

People often mistake companies in the aerospace and defence sector for defensive shares, when in reality the industry is highly cyclical. Military budgets are under pressure as governments look to rein in their spending, and a reduction in travel has put enormous pressure on the airline industry, which is ordering fewer planes as a result. Ultra has overcome these problems by building an extremely wide range of application areas, meaning it isn't too exposed to cutbacks in any one area – at the last count it had 100 distinct market niches within its 24 businesses, with no one platform accounting for more than 5 per cent of its sales. That said, some parts of its business are worth a specific mention, in particular the rapidly growing area of 'battlespace IT', which is underpinning the 28 per cent EPS growth forecast this year.

Nichols (NICL, 401p)

Shares in alcoholic drinks producers have lived up to their defensive credentials during the downturn – despite the fact that brewers have seen volumes deteriorate and distillers have seen drinkers trade down from premium brands, their shares appear to have fallen less far and recovered more quickly than others. The soft-drink story is even better, with the market growing steadily throughout the downturn and still offering huge potential for expansion into the emerging markets that have proved the saviour for alcohol makers. Among those benefiting from the market's resilience is Nichols, a small but internationally successful soft-drink maker. It's been around since the days of the British Empire, so is well known around the world, particularly in the Middle East where its Vimto is the best-selling drink during Ramadan with an estimated 90 per cent share of the cordial market. Its international sales climbed by a third last year, boosting underlying profits by 22 per cent, and it's pursuing new expansion opportunities in markets including South Africa and China.

Micro Focus International (MCRO, 437p)

Information technology has become the lifeblood of the global economy, underpinning billions of transactions made globally every day. And because it's so mission-critical, the banks and retailers that need to process this business can't afford to neglect their systems. In many cases, these systems are still significantly mainframe-based – after forming the basis of their systems for years, they're extremely stable and reliable, meaning it would be far too difficult and expensive to simply rip them out and replace them with new technology. Micro Focus is a key beneficiary of the inability to remove legacy systems – it provides tools that let companies squeeze performance out of ageing systems, and has made selected acquisitions to boost its capabilities in new areas. That's left it with debt, but strong cash flow means this should be paid down quickly, and its high degree of specialism means its 40 per cent operating profit margins are among the highest in the industry. And about half of its revenues come from recurring maintenance contracts.

Defensive growth