Friday, May 2, 2008

Three reasons to buy consumer staples right now!

Mr Market has been in a good mood these days. The recent upward movement in stock prices has led to a return of investor’s risk appetites. While we may very well trend higher, it may be a wise idea to consider a shot of consumer staples in your portfolio.

Here’s why:

  • The arguments for and against a recession are purely academic. The simple fact is that we are looking at below trend GDP growth for at least the next 2 years, and possibly a decline in GDP per capita. Right now, large caps with consistent cash flows are trading at historically cheap valuations. As the investing boat tosses and turns, investors will begin to pay up for companies generating stable consistent cash flows that are impervious to a slowdown. Advantage: consumer staples.

  • While energy prices are really high right now, quite a few strategists have called this a commodity bubble, with fundamentals justifying lower prices (You can check out my posts here and here discussing this further). When the bubble deflates and energy prices come down to reflect the new realities of slower global growth (based on IMF predictions), the money flowing out of energy issues could very well flow into the consumer sector. (I’m not recommending exposure to the consumer discretionary sector, because some of them will take a hit in a slowdown.)

  • Emerging markets strength. A lot of the growth in these names is through emerging markets. Consumer staples are a good way to play the ‘decoupling’ argument. You are not affected by a developed world slowdown, and stand to benefit from any growth in the developing world.

Best ways to play this? For a quick and dirty diversified way, you can buy the Consumer Staples Select Sect. SPDR ETF (AMEX:XLP). For active stock investors, Unilever plc (NYSE:UL), PepsiCo, Inc.(NYSE:PEP) and The Procter & Gamble Company (NYSE:PG) would be my picks.

Full Disclosure: no positions in any securities mentioned.