Consumer StaplesWhy This Safe-Haven Sector is No Longer Safe By Frank Curzio
After months of rising commodity prices, the "big name" consumer staples rally is ready to fizzle...
Consumer staples have long been considered a "safe haven" sector... an area investors can flock to when they get worried about the economy or the general health of the stock market.
"Staples" are products that consumers can't live without. Proctor & Gamble, Colgate-Palmolive, Kimberly Clark, and Coca-Cola are considered staple stocks. They make
diapers, detergent, toothpaste, tissue paper, and soda.
These companies are usually
slow growers... But they have steady cash flows and pay dividends of about 3%. More important, these companies typically have
"pricing power." That means they have an easier time passing off higher raw-material costs to consumers during inflationary times.
Staples tend to
outperform the S&P 500 during bear markets. With deficits surging and stocks getting expensive after a huge two-year rally, investors have been moving into these stocks and pushing the price of many of them higher. I suggest thinking twice before piling in right now.
You see, commodity costs have soared over the past 45 days. The prices of
wheat, corn, and oats are up more than 20%.
Gasoline prices are up more than 10%. Oil prices have climbed past $110 per barrel.
Under normal circumstance – or mild inflation – companies like Proctor & Gamble and Kimberly-Clark can simply raise prices to offset higher raw-material costs. But these are not normal times. Commodity prices are moving up so fast, margins for most companies in this sector are beginning to contract.
For example... last week, Kimberly-Clark said, "The rapid run-up in commodity costs has influenced our near-term profitability and a number of our businesses will be raising selling prices." The company reported a
9% decrease in first-quarter sales. Also, management said its costs for key raw materials would be roughly $500 million in 2011 – more than
double the original estimates.
On Monday, Proctor & Gamble said it's
raising prices on Pampers diapers by 7%. It will also increase prices on its Charmin and Bounty paper brands by 5%. Coca-Cola is
raising prices on its beverages by up to 15%. In January, Colgate-Palmolive said it would raise prices by 2% to account for higher commodity costs. There is no way Colgate can meet earnings estimates by raising its prices by 2% – when raw material costs are up 20% in less than two months.
These companies
must raise prices by a huge amount to maintain margins. My question is ... How much can these companies raise costs before consumers switch to cheaper brands?
Are consumers going to pay more than $40 for Pampers when BJ's Wholesale is selling its brand of diapers for $25? Will consumers pay $5 for a box of Frosted Flakes... or buy the generic cereal for almost half the price?
My point is
consumer staples don't have pricing power right now. In other words, consumers are not paying up for brand name products. Wages and job openings are still weak. People don't have enough money to splurge on brands like they did in 2007. This is why discount stores like Dollar Tree, 99 Cents Only Stores, and Dollar General are at 52-week highs. Business is booming for the companies that sell cheaper brands.
I'd be careful buying consumer staples as a safe-haven investment. Sure, their dividends are attractive in a zero-interest rate environment. But these yields are meaningless if these stocks decline 10%-20%.
If you're focused on safety right now, I recommend simply heading for the sidelines and waiting in cash.
http://www.growthstockwire.com/2708/Why ... onger-Safe
It's all about "how much you made when you were right" & "how little you lost when you were wrong"