5 Overvalued Consumer Staples Stocks to Sell NOW

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Consumer staples stocks are supposed to be a conservative, low-beta group, but investors who have owned stocks in this sector have been rewarded of late nonetheless. In the past 12 months, the Consumer Staples SPDR (NYSE:XLP) has surged 22%, outpacing the 16.6% gain of the SPDR S&P 500 ETF (NYSEARCA:SPY).

5 Overvalued Consumer Staples Stocks to Sell NOW

At this point, however, valuations across the sector have become extremely stretched. According to Factset’s most recent Earnings Insight report, consumer staples stocks are trading at a whopping 19.9 times 12-month forward estimates — well above the sector’s five- and 10-year averages of 15.8 and 16.8, respectively.

The consumer staples group is also the second-most richly valued sector in the market behind only energy, where valuations are skewed higher by the sharp drop in the earnings outlook. The 19.9 price-to-earnings ratio also puts consumer staples at a 16.4% premium to the valuation of the broader market.

These lofty valuations aren’t counterbalanced by similar strength in the earnings outlook. According to Factset, analysts are calling for earnings growth of just 2.1% for the consumer staples sector in 2015, below the 2.9% of the S&P 500. The story is similar for 2016, when the sector is expected to post growth of 8.6%, well below the 12.5% of the broader market.

As a result, the consumer staples sector now has more than its share of richly valued individual stocks. Five, in particular, stand out as being overvalued in relation to their growth prospects. In all cases, the less favorable risk-and-reward equation created by elevated valuations means that these stocks no longer offer the “safety” many investors may be seeking by owning consumer staples stocks.

Let’s take a look at these five overvalued consumer staples stocks that you should sell now.

5 Overvalued Consumer Staples Stocks: Clorox Co (CLX)

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Source: bigcharts.com

 Clorox Co (NYSE:CLX) has amply rewarded investors in recent months, returning 26% since the end of August and delivering an average annual return of nearly 20% since its post-crisis low of 2009. The stock has continued to rise thus far in 2015, thanks in part to the company beating estimates and increasing its guidance when it reported earnings on Feb. 4.

Still, the tepid reaction to the positive earnings report is telling: CLX stock opened higher on the news, finished the day nearly $3 off of its high, and it has flatlined since. The reason: plenty of good news is already reflected in the stock, as gauged by its trailing P/E of 27.5 and forward P/E of 22.5.

This type of valuation is simply no longer justified by the earnings outlook, with the company expected to generate 5.9% earnings growth this year and 7.3% in 2016. Clorox still offers a reasonable dividend yield of 2.7%, but the potential for gains from price appreciation has now largely been realized.

The bottom line: the strong six-month performance of Clorox stock, together with a valuation well above its recent average (as seen in the accompanying chart), indicates that it’s time to take profits in this name.

5 Overvalued Consumer Staples Stocks: J.M. Smucker Co (SJM)

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Source: bigcharts.com

 J.M. Smucker Co (NYSE:SJM) is another example of a consumer staples stock that’s heavy on valuation and light on earnings prospects.

Investors need to pay through the nose to own SJM, to the tune of 21.2 trailing earnings and 19.9 forward estimates. For this, you get a company expected to see growth decline 4.4% this year and recover only 7.4% in 2016.

What’s more, estimates for both periods have declined in the past 90 days, and the company — while beating on earnings — missed on the top line in its most recent earnings report. This marked the third consecutive quarter that Smucker delivered mixed results.

SJM stock pays a dividend of 2.2%, but this isn’t a sufficient premium to the 1.8% yield of the broader market to warrant overpaying for such modest growth prospects. With the stock having gained more than 18% from its January low, you’ll be hard-pressed to find a better time to cash in gains on SJM.

5 Overvalued Consumer Staples Stocks: Colgate-Palmolive Company (CL)

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Source: bigcharts.com

Like Clorox and J.M. Smucker, Colgate-Palmolive Company (NYSE:CL) is a stock with a valuation that is far too lofty for its growth outlook, making a would-be “safe” stock more perilous than it appears.

Following a 13.3% gain from its October low, CL stock is trading at a whopping 30 trailing P/E and 21.6 forward P/E. This valuation is far too expensive for a stock that’s set to grow 2.7% this year and 9.3% next year, and for which earnings estimates are coming down.

Further, Colgate-Palmolive is on track for flattop line growth with revenues of $17.3, $16.9, and $17.8 billion in the 2014-2016 period.

Recent headlines have been favorable, with the announcement of a dividend increase and share buyback, together with an upgrade from Citigroup Inc (NYSE:C). Still, with valuations at their current levels, this sort of news flow should be considered an opportunity to sell at a premium rather than to pay up for an overpriced stock.

5 Overvalued Consumer Staples Stocks: Molson Coors Brewing Company (TAP)

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Source: bigcharts.com

The problems with the brewing business are well known at this point. Americans are drinking less beer, and craft beers are gaining a bigger share of the market despite constant advertising by giants such as Molson Coors Brewing Company (NYSE:TAP).

This was evident in TAP’s most recent results, which saw the company report earnings per share of 55 cents (ex-items), well short of the 67 cents forecast by analysts. In addition, its revenue came in 5.3% year-earlier levels due in part to the strength of the U.S. dollar.

Future growth appears weak as well: analysts are expecting that the company’s revenues and earnings will decline 8.8% and 5.1%, respectively, this year. Weak comps aren’t expected to provide much of a lift in 2016, as earnings are projected to grow just 6.9%.

So what should investors pay for such a stock? At the very least, you would expect a P/E below the market. Instead, TAP stock is changing hands at 27.8 trailing P/E and 18.2 times forward P/E. But why pay a premium multiple for this stock, especially given that it has already gained 39% in the past 12 months?

Instead, anyone who has made money in this name should take every opportunity to sell while the stock, which was trading today just above $76, and is still above its lower support line at $73.

5 Overvalued Consumer Staples Stocks: Dr Pepper Snapple Group Inc (DPS)

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Source: bigcharts.com

With a 55% gain in the past 12 months, a three-year average annual return of more than 30% and no significant corrections to speak of, Dr Pepper Snapple Group Inc (NYSE:DPS) has rewarded virtually any investor who has owned the stock in that span.

But is DPS really a stock investors should buy right now?

The company is expected to deliver earnings growth of 6.3% in 2015 — which is superior to both The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) –and 6.4% in 2016, which is acceptable. Nevertheless, DPS operates in the declining market for sugary drinks, and it is counting on new products (think flavored water) to keep growth on track.

That might work with the stock at a compelling valuation, but at 22.2 trailing P/E and a 19.1 forward P/E, investors have to pay a premium multiple for a business in a shrinking, and highly competitive, market.

The bottom line: there are plenty of stocks that offer a more interesting opportunity than counting on DPS to add on to its already substantial gains of the past year.

As of this writing, Daniel Putnam did not hold an interest in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/clx-sjm-cl-tap-dps-5-overvalued-consumer-staples-stocks-to-sell-now/.

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