Best Of Breed Part 2: Staples And Discretionary

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 |  Includes: KO, TWX, XLP, XLY
by: Brad Kenagy

Summary

I look at the holdings of the Consumer Staples SPDR and the Consumer Discretionary SPDR to find the "best-of-breed" stock in each sector.

I combined fundamentals, corporate governance, and CEO approval to determine the best stock in each sector.

The two stocks I determined were "best-of-breed" have Under performed their respective sectors, however they have shown strong dividend growth.

This is the second article in a series of articles where I will highlight the "best of breed" stock for each of the nine major sectors covered by the SPDRs.

Best of Breed Part 1: Technology & Utilities

For this article, I will be covering the holdings of the Consumer Staples SPDR (NYSEARCA:XLP), and the Consumer Discretionary SPDR (NYSEARCA:XLY) to find the top stock in each. To aid in my search I will be using the Finviz.com stock screener to screen for fundamentals, corporate governance data from Institutional Shareholder Services [ISS], and glassdoor.com for CEO approval ratings. The reason why I chose these three categories was that I wanted to find companies with strong fundamentals, good corporate governance, and companies with employees who believe in management.

Step #1: Finviz Screener Criteria

I downloaded the holdings for XLP and XLY into a spreadsheet and copied them into the Finviz stock screener. I then used the following bullets below which are the screen criteria I used to get my initial list of stocks. I found that only 2 stocks of the 40 holdings for XLP, and 6 of the 85 holdings for XLY met the criteria I set below, and those companies are listed in the table below my criteria.

  • Return on Equity: +10%
  • Return on Investment: +5%
  • EPS Growth Past 5 years: Positive
  • EPS Growth Next 5 years: Positive
  • LT Debt/Equity: <1
  • Dividend Yield: Positive
  • Operating Margin: >20%
  • Profit Margin: >10%
  • Float Short: <5%
  • Performance [1 year]: Up

Consumer Staples

Consumer Discretionary

(NYSE:KO)

Coca-Cola Co

(NASDAQ:CMCSA)

Comcast Corp

(NYSE:BF.B)

Brown-Forman Corp B

(NYSE:CBS)

CBS Corp B

(NYSE:DIS)

Walt Disney Co

(NYSE:MCD)

McDonald's Corp

(NYSE:TWX)

Time Warner Inc

(NASDAQ:SNI)

Scripps Networks Interactive

Click to enlarge

Step #2: ISS Corporate Governance

For this step, I looked at the corporate governance score from ISS to see which companies had the lowest score. The score ISS gives is from 1-10, with 1 being the best score, which means that company has the lowest governance risk, where a score of 10 means that company has a high governance risk. The governance score for each company is listed in the table below, and the top 33% are highlighted, and those stocks will make it to my final step.

Consumer Staples

Consumer Discretionary

Governance Rating

Governance Rating

KO

Coca-Cola Co

5

TWX

Time Warner Inc

3

BF.B

Brown-Forman Corp B

8

MCD

McDonald's Corp

4

DIS

Walt Disney Co

6

CMCSA

Comcast Corp

8

SNI

Scripps Networks Interactive

9

CBS

CBS Corp B

10

Click to enlarge

Step #3: CEO Approval

For this step, I looked at the CEO approval ratings for each of the top companies from my corporate governance section above for Consumer Staples & Consumer Discretionary, and the results are shown in the table below. In addition, even though KO was the stock with the best governance score above I still included BF.B to show that BF.B has a higher CEO approval rating. Since KO was the company that passed my corporate governance rating, I concluded it was the "winner" however; it was interesting to see that Coca-Cola had a significantly lower approval rating than Brown-Forman. The Consumer Discretionary company with the highest CEO approval rating was Time Warner with 76%, and thus is the company that I have determined is the "best of breed" stock for the consumer discretionary sector, beating out McDonalds.

Consumer Staples

Consumer Discretionary

CEO Approval

CEO Approval

KO

Coca-Cola Co

62%

TWX

Time Warner Inc

76%

BF.B

Brown-Forman Corp B

92%

MCD

McDonald's Corp

70%

Click to enlarge

Performance of Coca-Cola & Time Warner Inc.

The two charts below show the performance of KO and TWX compared to XLP and XLY since the inception of both ETFs in 1998. As you can see KO underperformed the XLP, and TWX has significantly underperformed the XLY. The chart for TWX looks horrible for the long-term and is a great lesson for investors not to judge a company based on historical results. Time Warner had a huge share price spike in the tech bubble because it owned AOL (NYSE:AOL), therefore when the bubble burst and TWX divested AOL, the share price has not come even close to levels seen during the tech bubble. As far as KO goes, I was extremely surprised to see that it has underperformed the XLP.

Chart #1: Coca-Cola [Black line] vs. XLP [Blue Line]

Chart #2: Time Warner Inc [Black line] vs. XLY [Blue Line]

The pair of charts below show the yearly dividend totals for KO and TWX, and shows that KO has grown its dividend even through the financial crisis, where as TWX had a small blip in its regular dividend in 2009, however TWX did pay a special dividend that year so it more than made up for the dividend cut. [Dividend Data from Dividendchannel.com]

Click to enlarge

Click to enlarge

Closing thoughts

I believe Coca-Cola & Time Warner group are worth a deeper look because they met all my fundamental criteria, which I believe are important factors that make each company strong. In addition, by including additional factors like corporate governance and how employees views of management, I believe when combined with strong fundamentals is a solid method of determining stocks that are best of breed. In my next article, I will be covering the Energy & materials sectors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.