When investing client money, we use a combination of both value and growth stocks in client accounts, as well as using fundamental and technical analysis for timing entry and exit points for individual securities and ETFs.
Lately, we've had our eye on the Consumer Staples sector given Staples are now the most "oversold" sector of the S&P 500, outside of Telecom and Utilities, neither sector of which we usually traffic in for clients.
For a quick summary of the Consumer Staples sector in terms of what we are watching here are some "fast facts":
- Staples are roughly 10% of the S&P 500 by market cap;
- Earnings growth is pretty consistently mid-single-digit for the sector, with the last 6 - 8 quarters seeing 3% to 10% growth;
- Revenue growth is typically low-single-digit for Staples, with currency playing a big role in beats / misses, although the upside / downside for revenues is usually just 1% -2 % range;
- The key to the sector is "stability and consistency" of both earnings and revenue growth, with typically very positive cash-flow and decent dividend yields and share repurchase programs;
We do like the Staples stocks, and like several at these price levels:
Coca-Cola has had a rough go in 2013, dramatically lagging the S&P 500's year-to-date (YTD) return of 18% - 19%, versus KO's 2013 capital gain of 6% - 7%. Currency has played a big part of the drag as the relatively stronger dollar has hurt year-over-year revenue growth.
In q2 '13, KO revenues fell 4% y/y, while operating income was down 2% and earnings per share fell 4% on just 1% worldwide volume growth. KO continues to struggle in the U.S. with just 1% - 2% case volume growth in the carbonated soft drink (CSD) world since 1998, as Americans have moved away from CSD to alternative beverages.
With a 2.9% dividend yield, if you are buying KO here you want to own for a year when the S&P 500 struggles, such as 2011, where the S&P 500 rose just 2% - 3%, but KO saw some PE expansion and increased 10% (excluding the dividend).
KO is almost the equivalent today of a utility or telco, given its market-cap of $170 billion and its inability to grow faster than 3% - 5% a year.
Technically, at $38.50, KO is testing its uptrend line off the 2009 low and needs to hold in here. We've nibbled at small positions, for a "flight to quality bid" for the next tough equity market, but the stock isn't a bid position yet.
Morningstar values KO at $38 per share in terms of intrinsic value, while our internal model values KO at $48, and we always like to split the difference, so $43 seems to be fair value.
KO's all-time high was $44.47 in July, 1998, just prior to the Long-Term Capital Management crisis. The S&P 500 has gone on to make 3 new all-time highs in March, 2000, October, 2007, and then again in May, 2013 all the while KO lags.
The retail giant Wal-Mart also had a difficult July '13 quarter, with revenues +2%, y/y, operating income -2% y/y and EPS +5% y/y. International was weak, and grocery comps were negative which is very unusual. 50% of WMT's revenues are now grocery-related.
WMT is up about 6% YTD, not including the dividend and is trading down from its all-time-high of $78 in mid-May '13.
It is hard to think with a $240 billion market cap, and $500 billion in annual revenues, that WMT can grow at the 15% annual EPS rate it did in the 1990's, but the retail juggernaut should probably be able to grow EPS at high-single-digits and revenues at mid-single-digits for the foreseeable future, in a normal economy.
In fiscal '14, WMT is expected to grow revenues at 3% and EPS at 7%, with the stock trading at 15(x) earnings today, and 11(x) cash-flow.
If the $70.25 previous high doesn't hold, and the stock drops below that key support level on strong volume, we'd exit the trade and re-evaluate.
Morningstar's intrinsic value of WMT is $74 per share, while our internal model values WMT near $85. If WMT would close its price-to-sales gap of 0.50 and trade to parity on revenues, the stock could trade to $140. (Market cap of $250 billion, annual revenues of $500 bl.)
Procter & Gamble (NYSE:PG):
Our favorite of the oversold staples stocks today is PG, which has been trying to slowly change their business model to be "less premium pricing and more unit growth" (my interpretation, not theirs), given PG's very slow organic revenue and volume growth off the 2008 - 2009 Financial Crisis.
PG is up about 16% YTD (not including the dividend).
Although Bill Ackman's position in the stock was the catalyst to generate some changes at PG, (and former CEO McDonald may have gotten too bad a rap), bringing in AG Lafley, the former CEO to catalyze real change, may have been the ticket at PG.
In PG's fiscal q4 '13 (June '13), PG's organic revenue growth of 4% was the best since December, 2011, while the 5% volume growth was the best for PG since December of 2010.
So often in business, a strength today becomes an Achilles Heel tomorrow, and PG's premium brand strategy with premium pricing left the brand juggernaut at a disadvantage after the 1990's consistent growth in personal incomes and wealth, particularly in emerging markets after the 2008 Financial Crisis.
No question PG has struggled a little as their premium brands were priced well above private-label brands.
Our favorite analyst on PG is the Deutsche Bank's Bill Schmitz, and he describes PG as a company with "latent earnings power".
The recent announcement about the mid-tier Tide product (in terms of pricing) is a good example of brand re-positioning for PG.
Morningstar puts an intrinsic value on PG of $87 per share, while our internal model values PG at $83. However, with the right changes, some brand repositioning, and some lower pricing, I eventually think PG can trade to $100 on a $5 per share EPS number.
Currently analysts are looking for $4.30 and $4.67 for fiscal '14 and '15 which is 6% and 9% EPS growth respectively, with a PE ratio of 18(x) and 16(x) at present.
Technically, PG is re-testing its December '07 high of $75.18. That is a very important technical level, along with the 50 week moving average that sits at $75 presently.
This area should hold as key support. We plan to add more to our position in this price area, if the stock gets there.
A trade below $75 on heavy volume, and we'd re-think our position.
Longer-term PG is a winner, however the company has to go through these periods every few years, where they turn inward and re-evaluate the product lineup, but each time the stock comes out as good as new.
Campbell Soup (NYSE:CPB):
Recently a client inherited some Campbell Soup stock, and although we've never followed the company fundamentally, we looked at the chart and found CPB also oversold and also trading near its 200 day moving average:
We'd like to see CPB hold $41 - $42 per share as support.
If we were to rank our above-holdings in terms of preference to own at current prices, the ranking would look like this:
We've never had a position in Campbell Soup or looked at the stock fundamentally.
Consumer Staples stocks tend to give clients and a portfolio manager comfort in turbulent markets given their earnings stability and consistency.
- The stocks always look expensive on a PE basis;
- The dividends yields are typically attractive and look better today given interest rates;
- All three companies above, PG, KO, and WMT are paying out all of their free-cash-flow to shareholders in the form of dividends and share repurchases, so the companies are shareholder friendly.
- Their slower, but more consistent earnings and revenue growth look less attractive in strong equity markets like 2013, but look more attractive when uncertainty reigns supreme;
The stocks are trading at technically important levels. If you ever thought about the sector or these stocks, now might be the time.
Disclosure: I am long KO, WMT, PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.