3 Overbought Consumer Staples to Dump Now

Advertisement

All you need to know about the consumer in the United States is contained in two recent news releases.

3 Overbought Consumer Staples to Dump Now

Consumer spending was reported by the Commerce Department and it was a strong report. In fact, it was the strongest since 2009. However, the Conference Board released its consumer confidence report and reported that it dropped to 92.6 this month from a reading of 94.7 in April.

Consumer’s biggest concerns were jobs and the ability to get good ones. It’s a mixed bag right now: Consumers are spending but are still fairly cautious about it, and I don’t think it’s a great time to be piling into consumer-oriented stocks, especially given the fact that seven years into a bull market, they are selling at expensive valuation multiples.

Consumer oriented companies are priced for perfection, while a nervous consumer and intense competition raise the specter of possible imperfection. Consumer staples are far from dead, but they are not healthy enough to justify the price tag for some of the leading stocks in this area.

The following are three overbought consumer staples stocks to be wary of.

Overbought Consumer Staples to Dump Now: Nike Inc (NKE)

Overbought Consumer Staples: Nike Inc (NKE)

Nike Inc (NKE) is a great example of a company that is simply priced too high.

I was raised in a house where Keds and PF Flyers — selection determined solely by which one was cheapest at the time — were the shoe of the day, so I can say that I have never been able to justify the price of premium tennis shoes and have therefore never owned a pair of Nikes.

I do confess that a chunk of my first paycheck went towards a pair of Converse Chuck Taylor All Stars, but this was decades before Nike bought the company.

My youngest is a Dr. Who fan, so we have spent some money on several hues of Chucks this year, but I still wear cheaper off brands. I am, however, the outlier, and Nike still sells well. The problem is that you are paying a very high price for the stock right now. The share traded with an Enterprise Value/EBITDA ratio of 17.8 and a price-to-book multiple of 7.3. The stock has a trailing price-to-earnings ratio of 25 and fetches 22 times next years estimated profits.

It is a fine company, but the price is simply too high for intelligent investing right now.

Overbought Consumer Staples to Dump Now: Kellogg Company (K)

Overbought Consumer Staples: Kellogg Company (K)Kellogg Company (K) has a major problem to deal with in the future: Millennials do not like cereal.

According to the Washington Post, the biggest issue is that they do not want to clean up the bowl and spoon used to consume the stuff. I have two millennials, and I can tell you that this is probably not far off the mark.

I don’t know what we are calling the next generation, but I have one of those too, and they may have an even deeper aversion to the stuff. We have not bought a box of cereal in this house in years now.

Despite this fundamental weakness, the stock’s status as a dividend darling has pushed it to premium valuations.

Kellogg’s shares have an EV/EBITDA ratio of 21.2 and a trailing P/E of 47 right now. The stock is priced at about 19 times the optimistic expectations for 2017. I just do not think they can sell enough Pringles and Cheez-Its to offset the cereal weakness.

Overbought Consumer Staples to Dump Now: Molson Coors Brewing Company (TAP)

Overbought Consumer Staples: Molson Coors Brewing Company (TAP)Beer is the ultimate consumer product. Going to the game? Let’s get a beer. Out dancing the night away? Let’s get a beer. A problem with a co-worker? Let’s get a beer and talk it over.

If I am to believe the commercials on TV, beer will make me richer, taller, stronger and better looking.

Molson Coors Brewing Company (TAP) brewing is one of the leaders when it comes to beer. They make, co-own and distribute many of the leading brands in the world including Coors Light, Miller Lite, Molson Canadian, Coors and a host of other well-known brands.

Although I am more of a wine and bourbon type these days, if I am at the beach or the ballpark, I will reach for a beer and it is usually a Molson Coors product. I like beer, but not enough to pay 43 times trailing earnings and over 7 times tangible book to invest in the brewer and distributor. The EV/EBITDA ratio is 23, so it is hardly a bargain issue on that measure, either.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.


Article printed from InvestorPlace Media, https://investorplace.com/2016/06/3-overbought-consumer-staples-nke-k-tap/.

©2024 InvestorPlace Media, LLC