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.

Related Articles
  1. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  2. Economics

    Explaining Market Penetration

    Market penetration is the measure of how much a good or service is being used within a total potential market.
  3. Economics

    Calculating the Marginal Rate of Substitution

    The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  9. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Duty Free

    Goods that international travelers can purchase without paying ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!