While I have a serious value investing bent, I find it useful to read around and see what other market practitioners — such as growth investors, income investors and traders — are saying and doing. Staying on top of the news flow helps me think about how I might respond to an upcoming event or abnormal market movement.
Of course, occasionally I come across a statement that causes a double-take, because it’s impossible to think the author actually meant what he or she wrote.
In this case (I’ll be nice and not name names), it was a comment suggesting that investors should buy the large consumer staples companies because if the market corrects, they might go down less than other stocks.
Investors should buy stocks for a lot of reasons. I am a value investor, and I like to buy stocks that I think sell for less than the asset or liquidation value of the company. Louis Navellier is a growth investor, and he buys stocks that he thinks will have spectacular revenue and earnings growth that drive prices higher. I know others who buy stocks because they expect dividends to grow at a very high rate, providing above-average income as well as driving the stock price higher.
Those are all pretty valid reasons. Buying a stock — consumer staples or otherwise — because you expect it to go down less than others? That’s a pretty silly reason, if you ask me.
The article did make me curious enough to take a look at a couple large consumer staples companies to see if they were worth buying at current levels. The answer is “no way.” If you bought these stocks years ago and have already booked large profits, there’s no need to sell them and pay taxes, but I wouldn’t put a dime of new money into these consumer staples names at current levels.
Procter & Gamble (PG)
Procter & Gamble (PG) is the largest consumer goods company right now, and it’s hard to believe most of us don’t have at least a few P&G products in our homes. Procter & Gamble is even a great company — but that doesn’t make PG stock a great buy at current levels.
PG is not a growth stock right now; analysts expect sales and earnings growth in the single digits over the next five years. It certainly is not a great value at 21 times earnings and 3.2 times book value. Procter & Gamble shares do pay a decent dividend with a yield of 3.1%, but investors can find either cheaper stocks or even growth stocks that pay the same or higher.
Again, Procter & Gamble: Great company, but poor buy.
I am pretty sure I have a bunch of Colgate-Palmolive (CL) products around the house, and you probably do, too. Colgate also is a good company with a lot of great products, but it’s not a growth stock — earnings and revenue growth will be lucky to hit the high single digits over the next five years. Meanwhile, with CL stock trading at 27 times earnings and 3.4 times sales, it’s not exactly cheap either. The dividend yield of 2.2% isn’t compelling enough to justify purchases, either.
The same goes for most of the big consumer staples companies — sure, they make the products we all use every day, but that’s not a rock-solid reason to buy the stocks. Five years of yield-seeking and a rising market have pushed staples stocks beyond reasonable valuations, and they won’t grow fast enough for the momentum crowd.
No, you buy these big blue chips in a full-on market meltdown, then hold them for years. In a rising market, though, the prospects and valuation don’t justify a buy.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.