Slowed Growth

"Many of those defensive-type of businesses have become crowded and expensive," Chris Sheldon, who helps oversee $400 billion as chief investment officer for Dreyfus in New York, said in a telephone interview on Dec. 21. "We expect a twist in the flavor to occur at some point next year. Europe's debt crisis has slowed growth worldwide, but not interrupted it."

While profits at defensive companies are likely to fare better next year if global growth decelerates, valuations for the groups have gotten too expensive, leaving few attractive names in equities, according to Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati.

"It's tough to get terribly excited about any group," Sorrentino, who helps oversee $14.5 billion in assets, said in a telephone interview on Dec. 23. "We're not pounding the table that defensives are a compelling area right now. We've seen some significant sell-offs in the more cyclical areas," he said. "It's tough to ferret out something that can deliver some positive alpha to a portfolio."

Buying Opportunities

High valuations for foodmakers, drug companies and utilities proved to be buying opportunities for the S&P 500 and companies most tied to the economy during the past decade. Price-earnings ratios for staples, health-care and utility stocks rose as much as 13 percent above the S&P 500 in 2001, before the full index rallied 13 percent starting in September. Cyclical groups, including commodity producers and retailers, increased 19 percent in the same period.

The spread reached 16 percent in March 2007 before the index jumped 13 percent to a record and cyclical stocks climbed an average 16 percent. In November 2008, defensive stocks were 7.1 percent more expensive than the rest of the market. That was four months before global stocks bottomed and the S&P 500 doubled, sending shares of cyclical companies up 135 percent.

Profits among defensive stocks are forecast to increase 3.8 percent in 2012, according to more than 7,000 analyst estimates compiled by Bloomberg. Earnings are poised to climb 18 percent for banks and 11 percent for mining and chemical companies.

Gain Momentum

Economists predict the U.S. economy will gain momentum in 2012 after slowing to a 1.8 percent annual rate this year from 3 percent last year, as the unemployment rate fell to the lowest level in more than two years. Gross domestic product will expand 2.1 percent in 2012, according to the median estimate of economists surveyed by Bloomberg.