This post is the latest in a series that follows the criteria first introduced in the article "4 Characteristics of Outperforming Stocks in a Post QE2 Market." Links to previous posts in the series may be found at the end of this article.
No matter what is going on in the economy, people will still use soap, clean their clothes, brush their teeth and use diapers for their babies.
The household products industry within consumer staples sector contains only a select few names. But among those in the category are some of the largest and highest quality companies in the world. These same names are also worth investor consideration for the post QE2 market environment.
The following is a review of the four household products companies that ranked among the best based on the criteria discussed in the post 4 Characteristics of Outperforming Stocks in a Post QE2 Market.
Procter & Gamble (NYSE:PG)
Market Cap: $180.6 billion
S&P Quality Ranking: A+
P/E Ratio: 17.1
Dividend Yield: 3.2%
There's a lot to like about Procter & Gamble in the current environment. First, it is one of the largest and highest quality companies in the world with a dominant presence in arguably the most defensive industry category in the equity universe. P&G boasts an unrivaled product portfolio including 43 brands with over a half billion dollars in annual sales. The company is rock solid from an operational perspective, and its recent key headwind of rising commodities costs could soon abate if commodities prices continue to correct as QE2 comes to an end. P&G also currently trades at a 10% discount to its historical valuation. Not only does P&G set up well as an investment, it also sets up well technically from a trading perspective and held firm throughout nearly all of the Post QE1 period (with the exception of the flash crash on May 6, although it recovered virtually all of its value by the end of the trading day).
Trading Strategy: Procter & Gamble represents an attractive investment and trading opportunity. From a technical perspective, the stock has been trading in a consistent upward sloping trading channel. A definitive buy signal is reached when the RSI reaches 30 or below, and an equally clear sell signal is triggered when the RSI climbs to 70 or above. With an RSI currently at 39.40, P&G may be approaching such a buy signal soon if it corrects much further. And the opportunity to purchase at the bottom of the upward sloping trading channel in the $60.50 range would be particularly ideal. But given the high quality of the P&G name, an argument could be made to own the name now as an investment on the recent pullback.
Colgate Palmolive (NYSE:CL)
Market Cap: $41.4 billion
S&P Quality Ranking: A+
P/E Ratio: 17.7
Dividend Yield: 2.7%
Colgate Palmolive is a dominant player in the oral care category. The company's operational track record is impressive with steadily rising revenue growth and a double-digit earnings expansion over the past decade. Colgate Palmolive is among the most financially healthy companies around and is able to maintain its leveraged capital structure through its considerable free cash flow generation. The company also provides a low risk way to gain exposure to emerging markets, as it holds dominant market share in a variety of countries across Asia and Latin America. From a technical perspective, Colgate's price performance has been a bit erratic over the last year, but strong technical signals set up potential opportunity.
Trading Strategy: Colgate Palmolive trades at a near 20% discount to its historical average valuation and a 5% discount to its average valuation since the financial crisis. In late April, the company broke out above both its upward sloping price channel as well as its previous peak resistance in the $83 per share range. After peaking at $87.58 at the end of May, the stock has pulled back to what are now several support levels including its previous peak, the high end of its previous upward sloping price channel and its 50-day moving average. All of these factors coupled with the discounted valuation suggest that a good entry point may be currently presenting itself in Colgate Palmolive shares.
Market Cap: $25.4 billion
S&P Quality Ranking: A
P/E Ratio: 14.7
Dividend Yield: 4.3%
Kimberly-Clark and I go way back. It was the first stock I ever owned, received as a gift from my grandfather who was a stock investor going back to the 1930s and for whom my company is named. While I have been in and out of the stock several times in the years since, Kimberly-Clark remains a solid operational performer that sets up well as an investment heading into the Post QE2 market. While price performance over the last decade has been lackluster, the stock was among the best performers during the "QE Pause" period last summer, rising by over +6% in a market environment that was down -13% on the S&P 500 over the same time period. Technically, the stock also tested and held support at its 200-day moving average on three separate occasions along the way. Today, Kimberly-Clark offers a well protected and steadily increasing dividend that is currently a healthy 4.3%. Thus, you can get 12 basis points more in yield by investing in Kimberly-Clark than you can receive from a 30-Year Treasury bond. In addition, the stock trades at a 7% discount to its historical average and a 10% discount to its peers in the industry.
Trading Strategy: Kimberly-Clark may be offering an attractive entry point at present. The stock has held support at its 200-day moving average on six different occasions over the last 18 months. Following a recent pullback, Kimberly-Clark is currently trading just above its 200-day M.A. support. The stock has additional support in the $63 range, which has served as a past bottom on three separate occasions so far in 2011.
Market Cap: $8.9 billion
S&P Quality Ranking: A
P/E Ratio: 16.7
Dividend Yield: 3.6%
Although by far the smallest in the group, Clorox holds its own against its peers. The company has a strong roster of brands and has demonstrated itself to be a capable innovator to maintain competitiveness despite its smaller size. Operational performance has been steady including consistent year-over-year revenue gains, low double-digit profit margins, robust free cash flow generation and a healthy dividend that rises each year. Looking ahead, Clorox stands to benefit from any decline in commodities prices, which will lead through to lower input costs and potentially higher margins. Clorox stock has also behaved well from a technical perspective, including holding support at its 200-day moving average twice during the "QE Pause" last summer.
Trading Strategy: Clorox is quickly closing in on another buy signal. Two readings have proven fairly reliable for Clorox over the last two years. First is support at the 200-day moving average. Second is when the RSI falls toward the 30 range or below. At present, we are seeing Clorox heading toward both levels. While an argument could be made to simply purchase Clorox now, waiting for the stock to fall to the $65.50 to $65.75 range would provide a particularly ideal entry point. It is worth noting that conversely an RSI of 70 or higher has also provided a reliable sell signal for those that may be inclined to trade the name. Looking ahead, while Clorox is a company that is prone to gaps lower, typically on earnings announcements, such occurrences usually open up a good opportunity to get long the stock for another trade.
My next post in the series will be my final stop in the consumer staples space. The next sector on deck will be utilities.
Previous posts in the series:
10 Food and Beverage Stocks for a Post QE2 Market This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met. Disclosure: I am long PG, CL, KMB, CLX.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
Disclosure: I am long PG, CL, KMB, CLX.