Super Bowl 50 wasn’t just a football game. Instead, it provided the perfect metaphor regarding the current financial markets.
On one hand, the bulls pumping up the broad indices are the Carolina Panthers — full of hope and youthful energy.
On the other side are the consumer staples, or the Denver Broncos of the markets — solid and dependable, but lacking in exciting sound bites.
As it turned out, the flash lacked substance, and both the Panthers and the major indices have disappointed their respective fans while consumer staples are laughing their way to the bank.
This isn’t just a cute anecdote. The benchmark S&P 500 index is down 9.4% year-to-date and showing little in the way of mounting a recovery. The fact that global markets — highlighted by the 23% YTD collapse in the Dow Jones Shanghai Index — are in utter turmoil does nothing to raise confidence.
And some of the sexy names among stocks have wilted like Cam Newton under pressure, as evidenced by the 14.5% collapse in the Nasdaq Composite index. Is this officially a correction? Absolutely!
But in every crisis, there is an opportunity — and consumer staples are making the most of it. The benchmark exchange-traded fund Consumer Staples Select Sector SPDR (XLP) is still down for the year at 1.4%, yet this comparatively represents a huge step up against the stock market as a whole.
In addition, many of the individual names that comprise the consumer staples index are well into the black and typically offer consistent dividend yields to boot.
There’s an old saying in football that offense scores points but defense wins championships. It turned true for the Broncos and will likely be the same for consumer staples. Here are the top three names you want to own in this stable sector.
Consumer Staples Stocks to Buy: Procter & Gamble Co (PG)
No discussion of consumer staples is complete without mentioning Procter & Gamble (PG). Leveraging a market capitalization of $221 billion, PG stock is currently valued at almost twice that of its nearest competitor on this list.
Against total asset base and product portfolio — which includes universally recognized household goods like Head & Shoulders and Tide — there is no disputing the fact that Procter & Gamble trumps all.
Here’s why investors need to pay attention to PG stock. In an environment where companies are bleeding money left and right, PG stock’s free cash flow has been steady as a rock, averaging nearly $11 billion over the past decade.
Profitability margins when adjusted for the anomalously bad fourth quarter of fiscal year 2015 earnings result are outstanding compared to rivals within the consumer staples sphere. The current dividend yield of 3.27% is a nice bonus as well. So long as PG stock at least breaks even for the year, investors will take home a net gain.
But the real selling point is that PG stock may do much more than to simply ride the fence. On a YTD-basis, PG stock is up 3% despite taking a 4% hit during the first half of January.
If this trend keeps up, annual returns would easily exceed double-digits. Since hitting bottom this year, PG stock is up a whopping 10%. Leave it to a boring old consumer staples stock to show the rest of the markets how it’s done!
So don’t let the lack of pizzazz fool you — PG stock’s exceptionally solid fundamentals will help investors slog through this bearish season.
Consumer Staples Stocks to Buy: Kimberly Clark Corp (KMB)
While it may be the smallest of the consumer staples in this list, Kimberly Clark (KMB) packs a considerable punch, which is more than can be said about the broad markets right now.
KMB stock handily beat the S&P 500 last year when it returned a profit of nearly 14%. Even PG stockholders can’t say that as the markets punished the consumer staples giant for a series of poor earnings results. If recent price action is any gauge, the best is still to come for KMB stock.
After stumbling for the better part of January, KMB stock took a decisive stand, with shares currently up 2% YTD. From its lows of the year, investors have gained 6% — a solid number given the sad state of benchmark indices. More to the point, over the past three months, KMB stock is up over 9%, whereas the S&P 500 is down 11%. If that doesn’t show the clear dichotomy between consumer staples and the rest of the markets, nothing else will.
As with other names in the sector, KMB stock is backed primarily by its solid fundamentals. While top-line sales have declined in recent years due to overall weak consumer spending, Kimberly Clark maintains a strong free cash flow averaging nearly $1.8 billion over the past ten years. Nor is this figure associated with being stingy. In 2015, capital expenditures accounted for 46% of the take against cash flow from operations. Clearly, management is interested in growth and not just helplessly riding out the bearish storm.
KMB stock may not make the list of top 10 most exciting companies to buy, but it won’t leave you out in the cold once the hype dies down.
Consumer Staples Stocks to Buy: Unilever plc ADR (UL)
So you want the stability of a consumer staples stock, but a little bit of the spice that comes with speculative opportunities? Look no further than Unilever (UL)!
The company’s market cap of $125 and total asset base in excess of $58 billion means they know a thing or two about running a major global operation. At the same time, Unilever’s expansion into the emerging markets — particularly the Americas and eastern Europe — makes UL stock somewhat of a gamble.
The markets tend to agree. With a beta of 0.85, UL stock is mathematically the riskiest among the featured consumer staples. Generally speaking, a higher beta equates to higher volatility. Of course, we’re not talking about National Bank of Greece (NBGGY) volatility, but due to its international exposure, UL stock is more subject to currency fluctuations.
Most notably, Unilever missed consensus revenue expectations for both FY 2014 and FY 2015. This coincided with the period when the U.S. Dollar Index became extremely elevated, while emerging market currencies like the Russian Ruble were devastated.
At the same time, the company’s broad reach should serve UL stockholders well once such outside factors are mitigated. In 2015, Unilever shares returned 11% in the markets, and recent momentum suggests we could be in for an even bigger ride this year.
UL stock jumped 10% in the second half of January before fading a bit in the current month. Nevertheless, UL stock is up nearly 2% YTD, with its price action keeping pace with long-term averages.
Even with global markets tanking, UL stock has bested the major indices at every turn — 2016 will probably be no different.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
