Which is sexier? Reveling in the historic achievement of a company that staved off bankruptcy, went on to make products that changed the world and became the first trillion-dollar company, or mulling over the ramifications for the S&P 500 of Colgate-Palmolive’s (CL, Financial) strategic business decision to raise the price of Charmin?
For most investors, the answer is obvious. Those companies whose products include Kleenex, Bounty, Mr. Clean and Campbell’s tomato soup were, for most investors, blasé and wholly uninspiring. And the flow of funds out of consumer staples reflected this reality.
Investors have been drawn to tech stocks for the past year, riding a wave that has yet to crest. Many preferred the go-go thrill of the FANG group’s unheralded rise over the past year rather than the defensive sectors. In one sense, fund managers were captive of the "follow the crowd" phenomenon. What is a portfolio manager to do? Had the fund not participated in the tech stock boom, there would have been a reckoning.
One of the reasons the staples sector is so appealing now is there has been a predilection on the part of investors to gravitate toward the FANG, increasingly at any price. Some investors' love affair with the FANG group led to a dangerous overweighting in the tech sector. When Amazon (AMZN, Financial) carries a price-earnings ratio of 148 and sells for $1,879 per share, perhaps it’s time to look at some other large-cap companies with more stability and more realistic valuations.
Now that international trade tensions have moved from blustering and posturing by our trading partners to the actual imposition of tariffs by President Trump on Chinese goods, investors are rethinking their strategies and adjusting the mix in their portfolios. Staples traditionally provide a haven for investors during times of uncertainty and with the economic ramifications of the trade war as of yet, uncertain, investors are looking to reduce their overall exposure
Though the surf may still be up for the tech stocks, many defensive as well as enterprising investors are beginning to worry about valuations and overpricing. Consider the following price-earnings ratios: Kellogg (K, Financial), 14.6; Netflix (NFLX, Financial), 143; Amazon, 148.
Over the last three months, the consumer staples sector has risen 9.4%, outperforming the S&P 500’s 3.9% gain. The staples sector still trails the S&P 500’s 5.4% gain and is that index’s second-worst-performing group.
But these numbers are highly misleading. The tech sector has had a disproportionate impact on the market as a whole for years.
Consider the following: Amazon, Netflix and Microsoft (MSFT, Financial) alone accounted for 71% of the gain in the S&P through early July. Add in Apple (AAPL, Financial), Alphabet (GOOG, Financial) and Facebook (FB, Financial), and that figure jumps to 98%.
This reverse pyramid market reality demonstrates that valuations are skewed inordinately by the tech titans. when viewed from this perspective, the staples stocks look more appealing and certainly more realistically priced.
Those who have been so enamored by the FANG stocks for the past year should ask a simple question before it’s too late: is Netflix really worth $237 per share?
Disclosure: I have no positions in any of the securities referenced in this article
