IYK: Consumer Goods Offer Value for Investors

Ongoing market turmoil has paralyzed some investors and spurred others to turn back to basics in a hunt for bargain stocks. In the midst of the current financial chaos, some consumer products have begun to gain their footing, proffering dividends and value in an overleveraged economy. While other market sectors have fallen victim to recent volatility and the ongoing financial crisis, consumer goods have proven exceptionally steady in difficult times—a trend that has been mirrored by iShares’ Dow Jones U.S. Consumer Goods (IYK). As other ETFs are weighed down by financial components, IYK has continued its trek up our Sector Momentum Rankings in recent weeks, moving from the No. 29 spot on July 1 to the No. 7 position on September 23.

IYK tracks the value of domestic consumer goods stocks included in the Dow Jones U.S. Consumer Goods Index. IYK’s index measures the performance of a wide range of consumer goods products—from automobiles to beverages—and is rebalanced to reflect the capitalization of index members. As of September 29, IYK’s 149 components had helped the fund outperform a dismal market in 2008—with IYK dropping only 7% while the S&P faltered more than 16%.

This performance can be largely credited to IYK’s components, which have a good track record of paying their dividends. Top components such as Philip Morris (PM) and Procter & Gamble (PG) are among the highest dividend yielding products in the market today. IYK’s components also provide a defensive play against market turmoil. While some items become expendable in periods of economic strain, certain consumer goods categories—like tobacco and alcohol—are traditionally categorized as “defensive” stocks. These defensive stocks typically buck market trends, providing shelter and strong returns for investors even in the most difficult times.

IYK’s portfolio is well positioned to take advantage of this historical trend. With Philip Morris and Altria Group (MO) among its top ten components, IYK has a 13.69% fund concentration in tobacco. This concentration may prove beneficial to investors in the upcoming months as distress and uncertainty plague other market sectors. Philip Morris—IYK’s fourth-largest holding at 8.03%—sells products in 160 countries and generated more than $55 billion in revenue and $8.9 billion in profit in fiscal 2007. PM’s management expects a long-term earnings-per-share growth of 10% to 12%, a continued growth that could garner returns for IYK.

In addition to its defensive tobacco exposure, IYK also counts Anheuser-Busch (BUD) among its top ten components. Alcohol products are also counted as traditionally defensive stocks, and recent acquisition news might help boost shares of Anheuser-Busch as the year draws to a close. As markets slipped over 750 points on Monday, InBev’s shareholders OK’d a $9.8 billion takeover of the beer giant—a merger that InBev’s CEO, Carlos Brito, believes will happen quickly due to “limited overlap” between the two companies.

Some of IYK’s components have used current market conditions as a springboard for new “value campaigns.” In the September 29 issue of The Wall Street Journal, Julie Jargon noted that “food companies hope to capitalize on the slumping economy by steering consumers to cheaper, high-margin products.” Kraft—IYK’s seventh-largest holding—recently teamed up with Campbell Soup (CPB) to advertise Campbell’s soup and sandwiches made with Kraft (KFT) cheese as the “wallet-friendly meal your family will love.” In addition to promoting value, Kraft is also touting high-margin items like Kool-Aid in new ad campaigns. Robert Moskow, an analyst with Credit Suisse, noted, “Powdered Kool-Aid beverages are one of the most profitable food products in history.”

As the financial turmoil delivers blows across the board, IYK’s top holding, Procter & Gamble, waits for a shareholder vote on October 16. P&G announced the all-stock sale of Folgers to Smucker’s (SJM) earlier this year, and P&G’s shareholders are expected to receive a $5 per share dividend if the deal closes later this year. Among the 15 analysts that cover P&G, four rate the stock as a strong buy, three as a buy, and eight as a hold. The Folgers-Smucker’s deal—largely obscured by the current market sentiment—could lend cash and confidence to P&G’s shareholders and boost IYK’s returns in the months to come.

While IYK does encompass a wide range of consumer goods, it is important for investors to remain mindful of concentrated positions in the ETF’s top holdings, including P&G. With P&G making up 15.52% of IYK’s assets, fund holders will be more vulnerable to the movement of P&G’s price than that of IYK’s other components. A single event—like the unraveling of P&G’s tentative Folgers deal—could cause IYK to buckle under the news.

As the Dow Jones Industrial Average continues to fall in intraday trading on Monday, defensive and dividend yielding stocks—like those included in IYK’s portfolio—may present safer investment opportunities. While these products might not offer as much bounce on an upswing, they present an opportunity to bargain hunters looking to scoop up undervalued products amid the negative sentiment. IYK comprises household names that have consistently performed over time—names that could continue to offer the most comfort in the face of crisis.

Comments

[livesinhiscar:]

Also consider the Global ETF version - KXI
There are lots of great consumer staples companies outside the US as well.

2008 Oct 02 11:27 AM

[SA Guest:]

I posted this in a couple of other places but thought I would place here as well

A one hour interivew of Warren Buffett by Charlie Rose - October 1, 2008. (The bail out will make money if you buy at market)

video.google.com/googl...

If the above link does not work try this one

www.charlierose.com/gu...

2008 Oct 02 05:43 PM