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VDC And XLP: Staples Crushed Growth And Technology Over 21 Years


  • Growth loses to value, we show you one longer-term case study.
  • The staples sector is perfect for this as it is about the hardest one to get excited about, growth wise.
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Three boxes of Assorted Kelloggs Cereal

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Cycles. We have them in the laundry room and we have them in biochemistry. We also have them in the market. Unfortunately, people forget that. Consider this article as a reminder. In this one we are going to do a few

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

We have some long positions on Staples Sector ETF components and some short positions on QQQ components.

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Comments (14)

I worked in the consumer goods area for 37 years. The companies have done well on a long term basis. What caused many of them to grow from the fall of the Soviet Union until the Great Recession was global expansion. That is largely gone and the companies don’t have any other large source of growth. For the past decade many of them have been low growth to no growth businesses. For this sector past performance is not prologue for what’s coming. They are likely to get price increases reflecting inflation and not much more.
psioni profile picture
@Bob Bailey You make a good point about globalization. I wonder if it has really run its course. China, SE Asia, India and Africa all are expected to have large growing population with middle class income. Another source of growth for some of these companies is premiumization; for example Diageo refocusing on premium spirits, or Unilever selling off low margin brands and balancing more towards premium high margin ones.
Great analysis, thanks for this article. One ETF I like in this space is RHS, an equal weighted consumer staples ETF. Fees are higher, but over the past 10 years and over its full lifetime it has outperformed VDC and XLP.
Trapping Value profile picture
@ExIRguy Thanks for reading and the idea!
Expense ratios do not matter do they as return are Net of Expenses?
FognFriction profile picture
Really interesting analysis - thanks!
Be careful of anything that is looking backward. Demographics and household formation going forward are the opposite of the last 70 years.
Baloney Sandwitch profile picture
Good insight. I think this is another low volatility factor investing. Low volatility stocks (like staples) tend to outperform over long periods of time if you are a buy and hold investor. Tech is high vol (with long cycles).
Trapping Value profile picture
@Baloney Sandwitch Yes great point. Thanks for reading and commenting.
I like your contrary thinking. I also like the comment below about the risk of margin compression. Interesting setup.
FROGBERT profile picture
I'm on the other side of the staples trade having recently rung the register on PG, MDLZ & KHC at significant gains. My thesis is that rising costs will squeeze margins and branding won't be strong enough to prevent margin compression. The valuations on these was very full so no room for multiple expansion in rising rate environment. These are good co's and if they sell off to the point of being good values, I'll buy them back.
Trapping Value profile picture
@FROGBERT I agree that is a risk. It is hard to blend my bullish views on commodities with consumer staples picks but they tend to be great portfolio stabilizers when you get the inevitable sharp selloff in commodities. You have to pick the ones that are modestly valued and have some semblance of pricing power. As long as we do that, margin pressure is not the end of the world.
Kenmare profile picture
Very stimulating piece, TV. Many thanks. Would you care to share a few of your favorite individual issues in Staples we might consider?
Trapping Value profile picture
@Kenmare Thanks for reading.
One to consider would be ConAgra Brands. Also there is picture up for you for a second choice :)
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