Proctor & Gamble (NYSE:PG), or P&G, the storied consumer products company, is an example of a company we don’t own. Like many consumer staples companies, its moat is still substantial but not what it once was. The result is earnings growth of less than 2% over the past seven years, but its stock inexplicably trades at 20.8x 2019 consensus earnings estimates. Nonetheless, the Fund would have been better off owning it rather than many of its existing positions last year, as P&G delivered a total return of 3.57%. Yet P&G’s historic growth rate is lower than the Fund’s portfolio companies, which more importantly in our eyes, trade more inexpensively and offer better growth prospects. P&G is no better nor worse than a number of other consumer staples companies we could have discussed.
We find this illogical. Maybe the valuation disparity is due to expectations for a weaker economy that might allow consumer staples to outperform for a time. Or maybe it is due to passive investing, which makes indiscriminate purchases as a function of inflows. However, if the stock market didn’t offer irrational moments, everyone would invest in passive vehicles, and we wouldn’t be in business. We prefer our portfolio.
From Steven Romick (Trades, Portfolio)'s Crescent Fund fourth quarter 2018 shareholder letter.
