Friday, February 17, 2012

Consumer Staples Stocks: An Idea Gone Cold?

Tennis Anyone?
Random Glenings will not be published next week as the author will be on vacation.  Next post will be February 27.

One of best performing sectors in the stock market last year was the consumer staples area.

Investors flocked to companies like Coca-Cola; General Mills; and Procter & Gamble due to their relatively attractive valuations and handsome dividend yields.

Moreover, the thinking went, the products these companies offer are less vulnerable to economic shocks, thus making them the ideal choice for conservative stock investors.

Problem is, at some level any stock, even ones in stable business models, can become overpriced, and vulnerable to periods of weakness or sharp corrections.

Consumer staples stocks in the month of January fell by -1.7%, lagging the +4.5% rise in the S&P 500.

 Only two other sectors - the "safe" utilities and telecom sectors - were worse performances for the first month of 2012.

February has also largely proved to be unkind to the staples's sector.

Not only is the sector continuing to lag the broader market averages, but unwelcome (i.e. poor) earnings reports from Smucker's; General Mills; and Pepsi have all caused significant price drops in a group that was not supposed to be vulnerable.

The problems that many of these companies are facing relates to a very price-sensitive consumer.  Smucker's, for example, raised the price of its peanut butter Jif fairly significantly in the fourth quarter of 2011 to reflect the higher costs of peanuts.  However, at some price,  even "choosy mothers" will choose a generic peanut butter rather than branded, and so sales of Jif have suffered significantly in recent weeks.

Despite their recent weakness, most consumer stocks still are trading at a significant price/earnings premium to the broader market indices.  Many of these premium valuations are also at historic highs relative to the experience of the last decade.

Coca-Cola, for example, still trades a P/E that is 40% higher than the S&P 500.  It has only traded at this level twice in the last decade (2002 and 2008), and both times the stock fared poorly in the subsequent 12 months.  Other stocks in the group have a similar pattern.

The book of Ecclesiastes in the Bible teaches us that "there is a time for everything, and a season for every activity under heaven".

It might be that for now, at least, this is not the season for the consumer staples sector.