Assessing the Crowded Defensive Trade: A Value Investor's Look at TPB, JNJ, and NEE

The market's mood has shifted. Year-to-date in 2025, a clear rotation has taken place, with defensive stocks sharply outperforming their cyclical peers. While the defensive stocks are up 5.2%, cyclicals have fallen 7.9%. This move is a direct response to a mixed economic backdrop where slower momentum and rising uncertainty are making stability more valuable than speed. Investors are seeking shelter from volatility, particularly around tariff policy, and are favoring companies with steady operations and durable demand.

This defensive tilt is a classic reaction to a less predictable growth environment. As one analysis notes, when earnings visibility narrows, investors naturally rotate toward businesses that serve everyday needs-healthcare, utilities, and consumer staples. These companies generate more predictable revenues, which helps reduce portfolio volatility during uncertain times. The trade is sensible, even prudent, in the face of a functional but vulnerable economy where consumer spending has shifted toward necessities.

Yet here lies the core disconnect. Despite the sharp rotation into defensives, the underlying earnings story tells a different tale. Projections show cyclicals are set to outpace defensives through 2027. According to estimates, the cyclicals index is projected to grow earnings at 6.7% in 2025, accelerating to 13.6% in 2026, while the defensive index grows at a steadier but slower pace. This divergence suggests the market's current preference for stability may be priced in, while the longer-term growth potential of cyclical sectors remains overlooked.

The thesis, therefore, is one of disciplined assessment. Defensive stocks offer a valuable moat of stability, but their recent outperformance and high valuations mean the trade may be crowded. For a value investor, the key is to look past the noise of short-term macro fears. The real opportunity may lie in evaluating whether the current price of defensive stocks fully reflects their intrinsic value and competitive advantages, or if the rotation has gone too far. The earnings data implies that the speed of growth, not just the stability of cash flows, will ultimately drive returns over the long cycle.

Company-by-Company Moat Analysis: TPB, JNJ, and NEE

When evaluating defensive stocks, the quality of a company's competitive advantage is paramount. It determines whether earnings stability is a fleeting trend or a durable feature of the business model. Turning Point Brands, Johnson & Johnson, and NextEra Energy each possess distinct moats, but their sources and durability differ significantly.

Turning Point Brands (TPB) operates with a narrow but potent moat built on brand loyalty in niche oral nicotine categories. Its strength lies in the habitual consumption of its premium brands like Stoker's MST and Zig-Zag, which exhibit stable usage patterns that are less susceptible to economic downturns. This creates a reliable cash-generating core. The company has actively defended this position while reshaping its portfolio toward modern oral nicotine offerings, a move that has supported consistent margin performance. Evidence of this operational discipline is clear in its financials: the company has a trailing four-quarter earnings surprise of 17%, indicating its ability to consistently meet or exceed expectations. However, this moat is not without friction. The business faces regulatory shifts and intense price competition, which could challenge its premium valuation and compress margins. Its current price-to-earnings ratio of 31.5 times is notably higher than the industry average, suggesting the market has priced in significant future growth that may not be guaranteed.

Johnson & Johnson (JNJ) possesses a wide economic moat, a hallmark of a durable business. This advantage stems from its diversified, non-discretionary healthcare portfolio. Demand for prescription medicines and medical technologies is largely inelastic, providing a powerful buffer against consumer spending shifts. This portfolio depth, combined with a disciplined innovation pipeline, allows JNJ to protect cash flows during economic uncertainty while still investing in long-term growth. The company's resilience is reflected in its earnings trajectory, with consensus estimates suggesting current and next fiscal-year EPS growth of 8.9% and nearly 5.7%, respectively. Its trailing earnings surprise of 3.8% further underscores the reliability of its execution. For a value investor, JNJ's moat is classic: it sells essential goods and services that people need, regardless of the economic weather, creating a foundation for smooth, compounding earnings over long cycles.

NextEra Energy (NEE) has a regulated utility moat, which provides a unique blend of stability and strategic growth. Its core business offers essential electricity services with inherently predictable demand, a key defensive characteristic. Yet NEE's moat extends beyond mere stability. The company is strategically positioned to capture long-term structural growth themes, most notably the surge in power demand from data centers. Management has signaled this focus by planning to build 15 GW of new power generation for data center hubs by 2035. This forward-looking investment is already paying off, as evidenced by the company's recent raise in 2025 adjusted earnings guidance. The regulated utility model provides a steady cash flow stream to fund these capital-intensive expansions, creating a virtuous cycle. For investors, NEE offers the defensive visibility of a utility paired with the growth potential of a leader in energy infrastructure, a combination that is particularly attractive in a volatile macro environment.

The bottom line is that each company's moat dictates its risk-reward profile. TPB's narrow moat offers high growth potential but is sensitive to competitive and regulatory pressures. JNJ's wide moat provides exceptional stability and reliable cash generation, albeit at a more modest growth rate. NEE's regulated utility moat offers a predictable income stream while its strategic positioning in growth themes like data center power provides a path for future expansion. For a disciplined investor, the choice depends on whether they prioritize the high-conviction growth of a niche brand, the rock-solid consistency of a healthcare giant, or the balanced growth-stability of a utility leader.

Valuation and Crowding: The Price of Safety

The defensive trade is crowded, and the prices reflect it. Investors are rotating toward companies with stable demand, but the recent rallies and premium valuations suggest sentiment may have already priced in a great deal of perfection. For a value investor, this is a classic setup where the safety premium can sometimes become a value trap.

Turning Point Brands (TPB) exemplifies this dynamic. The stock has surged, up about 63% this year and more than tripling over three years. Yet its valuation tells a different story. The company trades at a price to earnings ratio of 31.5 times, a significant premium to the global tobacco average of 13.4 times. This gap suggests the market is rewarding TPB's growth momentum and premium brand portfolio heavily. The question is whether that multiple can be sustained. The company's strong earnings growth and brand loyalty provide a foundation, but intense competition and regulatory shifts around nicotine pouches are clear risks that could compress this premium if fundamentals falter.

Johnson & Johnson (JNJ) shows a similar pattern of strong investor favor. The healthcare giant has seen its shares rally 36.2% in the past year and holds a Zacks Rank #2 (Buy) status. Its earnings growth, while steady, is more modest, with the current fiscal year's consensus estimate pointing to about 8.9% EPS growth. The rally has pushed the stock into a higher valuation band, where the safety of its diversified, non-discretionary business is now fully reflected. The key for JNJ is execution-maintaining that growth while navigating a complex pipeline and regulatory landscape.

NextEra Energy (NEE) offers a different defensive characteristic: essential utility demand paired with structural growth. Its stock has risen 12.1% in the past year, and the company's reaffirmed target to raise dividends per share at roughly 10% per year through 2026 is a powerful value driver. However, even this growth story faces valuation pressure, with analysts recently trimming price targets. The utility's expansion into data center power generation is a long-term bet on rising demand, but the stock's current price already embeds a high degree of confidence in that trajectory.

The bottom line is that the defensive trade is now a crowded one. Whether it's TPB's premium P/E, JNJ's 36% rally, or NEE's dividend growth target, the market is paying up for stability. For a disciplined investor, the risk is that these prices leave little margin of safety. The setup demands a focus on durable competitive advantages and the ability to compound earnings over long cycles, not just on the comforting narrative of steady demand.

Long-Term Compounding vs. Short-Term Crowding

The value investor's lens demands a clear separation between price and intrinsic value. Today's market sentiment, however, often blurs that line. Defensive stocks-companies like Procter & Gamble, Johnson & Johnson, and Walmart-have become crowded safe havens as investors brace for a potentially stormy 2026. The appeal is straightforward: these are businesses that sell what people need, generating stable cash flows regardless of the economic cycle. As one analysis notes, they are the financial equivalent of comfort food, providing downside protection during market downturns and consistent dividends.

Yet this very popularity creates a valuation tension. The market's search for safety has driven prices to levels that price in near-perfect execution. Consider the trio of household names: Walmart trades at around 39x earnings, Costco at 46x, and even the more reasonably valued Procter & Gamble sits at roughly 21x. These are not cheap multiples. The value investor must ask: does the current price leave a sufficient margin of safety for long-term compounding, or has the crowd already bid it to perfection?

Historically, defensive stocks offer a clear trade-off. They typically have a beta of less than 1.0, meaning they rise less than the market in bull runs. In a strong economy, they become "solid foundations" rather than growth engines. The key question for 2026 is whether the current setup still offers a compounding engine over a full economic cycle. The evidence suggests a mixed picture. While these companies have shown resilience, with some, like Turning Point Brands, posting strong earnings growth, the broader defensive sector faces headwinds. Private-label competition pressures margins, and higher costs can limit earnings growth even in a downturn.

The bottom line is that the value investor prioritizes intrinsic value and a margin of safety over short-term market sentiment. The current price for many defensive leaders may not provide that margin. The historical pattern shows they underperform in strong bull markets but shine in downturns. With the market already pricing in safety, the risk is that they will deliver neither exceptional growth nor adequate protection if the economy drifts sideways or faces a mild slowdown. The key question remains: is the current price still a buy for the long-term compounding machine, or has the crowd crowded it out?

Catalysts and Risks: What Could Break the Trade

The defensive trade has been a powerful narrative in 2025, with these stocks providing a haven as markets grappled with uncertainty. Yet every crowded thesis carries its own vulnerabilities. The setup for 2026 hinges on a few key catalysts and risks that could validate or invalidate the stability story.

The primary macro catalyst is a shift in the economic narrative. If data proves resilient and sentiment swings back toward cyclicals, the defensive premium could compress. As noted, cyclicals are actually projected to outpace defensives in earnings growth through 2027. A sustained economic slowdown, however, would likely reinforce the trade, pressuring discretionary spending while providing a buffer for staples and utilities. The key risk here is that the market has already priced in a degree of perfection. As one analysis points out, defensive stocks like Walmart and Costco are trading at premium valuations, with Costco at 46x earnings. In a prolonged slowdown, even these durable businesses may struggle to deliver the earnings growth needed to justify those multiples.

For Turning Point Brands specifically, the risks are more direct and operational. The company's growth story is built on expanding modern oral nicotine categories, a space that faces two clear threats. First, regulatory shifts around nicotine pouches could alter the competitive landscape or increase compliance costs. Second, the company operates in a market where intense price competition is a constant. Any erosion in pricing power or margin pressure from rivals could quickly challenge the bullish outlook and compress its rich valuation, which sits well above the tobacco industry average.

The broader theme is whether the defensive trade has become crowded and therefore vulnerable. The sharp rotation into defensives in 2025 has created a situation where many of these stocks are no longer cheap. While their moats provide downside protection, they may offer limited upside if the economy avoids a hard landing. The bottom line is that these companies are not immune to change. Their strength lies in consistency, but that consistency must be matched by earnings growth to support current prices. If the macro backdrop shifts or specific business risks materialize, the defensive trade could face a challenging year.