As the overall market has swooned during the last few years, even dull sectors have gotten swept up in the in the gains. That’s included the boring makers of razor blades, shampoo and mac-n-cheese. Consumer staple stocks have spent much of the year following the market higher- with the Consumer Staples Select Sector SPDR (NYSE:XLP) posting an impressive 22.89% year-to-date.
That sort of high flying return has some market pundits questioning whether or not the normal staid sector has gone up too much and even prompted fears of pending staples crash.
However, historical data is pointing to a number of reasons to be still bullish on those firms that make the daily items will all need. For investors, it may be too soon to give up on consumer staples.
Still Value Left
Companies like industry stalwart Procter & Gamble (NYSE:PG) that produce food, juice and soap may not be exciting, but they tend to be very predictable. Their non-cyclical nature makes them perfect additions for a portfolio looking for shelter. They also tend to have hefty cash flows and dividends. All of these factors could help explain why the consumer staples have become popular investments over the last few years.
However, popularity does have its drawbacks.
As many income seeking and older investors sought the relative safety of the staples, valuations for the group have been pushed upwards to what some analysts have called “bubble-like.” At one point, the several stocks in the sector– such as spice maker McCormick (NYSE:MKC) –were trading at 22 times forward earnings an unheard of multiple for the sleepy sector.
Yet, after a recent pullback, the purveyors of toilet paper and cheese could be ripe for the picking.
According to a recent report by investment manager Fidelity, the price to earnings (P/E) ratio for consumer staples stocks was at 16.8 at the end of the third quarter. That’s basically in-line with its long-term average. Nonetheless, when Fidelity compared this appraisal to the S&P 500, the found that consumer staple stocks were only 6% more expensive than the overall market. That’s below the historical 10% premium that they normally trade at. Secondly, staples stocks are trading at less-than historical norms relative to their high-flying consumer discretionary twins.
Adding this reversion to the mean to the sectors 2 to 3% earnings growth this year and Fidelity reckons that staples stocks could outperform well into 2014.
Making A Play For The Staples
Given the recent pull-back and the chance to outperform, investors may want to load up on the makers of toothpaste and the like. Aside from the previous mentioned XLP, a great choice could be the Vanguard Consumer Staples ETF (NYSE:VDC). The exchange traded fund tracks 111 different staples firms including Colgate-Palmolive (NYSE:CL). The fund is one of the cheapest options for investors as well. Expenses run just 0.14%. However, the funds underlying index does play a bit “loose” with the staples and includes some retail exposure Kroger (NYSE:KR). Another option could be iShares US Consumer Goods (NYSE:IYK) which strictly focuses on goods producers.
Another option could be individual staples stocks.
The beverage makers could be poised for outperformance in the months ahead. Coca-Cola (NYSE:KO) has declined about 15% since hitting its recent highs. Yet, new growth initiatives in developed nations- such as sports drinks and water beverages- as well as emerging markets newfound thirst for soda should help propel earnings forward. Meanwhile that decline has pushed shares below historically measures. KO can be had for a forward P/E of just 18 and 2.8% dividend. Likewise, smaller rival Dr. Pepper Snapple Group (NYSE:DPS) can be had for P/E of 15 and 3.1% yield. Both could great picks given their dividend strength and recent weakness.
Another great option could be Kimberly-Clark (NYSE:KMB). The company operates in the boring business of toilet paper and paper towels. And it’s about to get even more boring. Kimberly recent announced that it is has plans to spin-off its healthcare business- which makes products such as sterile wraps, surgical face masks and catheters- as a standalone company. That business has been a volatile contributor to earnings and the spin-off should “smooth-out” returns at KMB. This will ultimately lead to higher returns for shareholders.(L6)
The Bottom Line
As the markets have swooned, so have many boring sectors. That includes consumer staples stocks. Still, the sector could still be a value based on historical data. Investors may not want to abandon the producers of pickles, dish soap and cigarettes just yet.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.