Year-to-date, CLX stock is up nearly 10% while the S&P 500 has fallen by more than 20%.
The market will come back after the pandemic, but does that mean Clorox will fall? That’s the question investors were asking as trade opened March 25.
CLX stock was selling for over $171 per share, a market capitalization of $21 billion and a price-earnings ratio of 26.8. That’s higher than Microsoft (NASDAQ:MSFT).
The Bull Case on CLX Stock
Part of the debate is over whether lifestyle changes wrought by the coronavirus are temporary or permanent.
InvestorPlace analyst Matt McCall is on the side of permanent. The stock was hurt by price hikes last year, which are now being gratefully absorbed, he writes. Disinfecting has become a new normal, which should mean a permanent lift to the company’s sales.
UBS analyst Steven Strycula agrees. He sees a 40 cent per share boost to earnings. He thinks sales will increase even if Clorox’s advertising goes down, as it did when demand exploded. Costs for resin, a key ingredient, should also fall with lower oil prices.
InvestorPlace’s Josh Enomoto also sees disinfectants as an intriguing catalyst for CLX stock. A list of disinfectants from the U.S. Environmental Protection Agency became a gold mine for the stock. He sees permanent changes in behavior coming, as more pandemics could emerge at any moment.
The Bear Case
The bear case is that, while Clorox may be everyone’s favorite right now, it’s simply overpriced. The shares hit their first record price in February, before the crisis hit. The gains made since then may quickly fade.
Most of Clorox’s revenues come from products other than disinfectants. Clorox makes Kingsford charcoal. It makes Glad sandwich bags. It’s the home of Fresh Step and Scoop Away cat litter. It’s the home of Liquid Plumr drain cleaners. Clorox even makes Hidden Valley Ranch salad dressing and Burt’s Bees skincare products. Disinfecting products represent only 25% of Clorox’s revenue.
Hysteria for cleaners and disinfectants has cleared out store shelves. But that hysteria will fade, even if the sales don’t. Even before the pandemic hit, CLX stock was expensive. This is despite sales growth of just 1% last year, and 2.5% the year before. Net income hasn’t improved since 2018.
Even some of the bullish calls from analysts are for buying shares at lower levels. This is a stock that may not be worth chasing.
The Bottom Line on Clorox Stock
Clorox recognizes that its good fortune shouldn’t all go to shareholders. It has pledged $5 million, so far, to groups fighting the virus, like the Emergency Response Fund run by the Centers for Disease Control and Prevention.
Buying CLX stock today is a bit like buying Costco Wholesale (NASDAQ:COST). It’s a good company. You can depend on it. But you buy it right now for defensive reasons, to preserve your capital, at least at current prices.
In the end, the Clorox story offers another example of a standard investment lesson, the need for diversification. Don’t keep all your eggs in one basket. Own defensive stocks as well as growth stocks. Trends can reverse on a dime and the best portfolios are always balanced against them.
That doesn’t mean you sell Amazon (NASDAQ:AMZN) and buy Clorox while Amazon is going to the sky. It means you keep stocks like Clorox in your portfolio for a rainy day.
Like this one.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.