This month at The Motley Fool we've dedicated ourselves to getting back to basics, culminating on Sept. 25 with Worldwide Invest Better Day. With this in mind, my Foolish colleagues and I are unleashing vital information to help you invest better. In a previous article, we reviewed stock diversification, a key fundamental of investing. One by one, we'll take a look at the various stock sectors, focusing today on consumer staples.
The staples of consumer staples
Characterized by ubiquitous products and direct selling to customers, the sometimes-considered-boring consumer staples sector begs notice since consumer spending represents over two-thirds of U.S. GDP. We use staples products daily, consume them quickly, and think of them as necessities -- for example, deodorant and bottled water. Staples tend to be recession-resistant and more stable over time relative to other sectors, because people still need cereal and laundry detergent in both good economic times and bad. Using the MSCI World Index sector weightings as a benchmark, approximately 11% of your overall stock portfolio should be allocated to consumer staples.
How staples perform
Over long spans of time, staples firms are consistent high performers. In the past decade, staples returned 108% versus 96% for the S&P 500. And even though no sector was safe during the most recent recession, the staples sector held up better than the overall stock market, losing 28% compared to the market's 55% decline. That said, staples typically lag behind when the stock market is humming. During the recent stock run-up beginning March 2009, staples returned 101% versus 128% for the market.
What makes a staples company a household name for the long run?
Cutthroat competition and economies of scale give companies like Wal-Mart (NYSE: WMT ) and Altria Group (NYSE: MO ) a stranglehold on the competition. For over 65 years, Wal-Mart has threatened five-and-dime mom-and-pops, grocery stores, and department stores, and left most everyone in its wake. And now the megaretailer is putting pressure on pharmacies as it pushes to expand its health care offerings. Meanwhile, Altria, the U.S.'s largest tobacco company, with brands including Marlboro and Virginia Slims, has enormous pricing power because there are few dominant U.S. tobacco companies. Marlboro enjoys a 42% domestic cigarette market share among the approximately 20% of the U.S. adult population who smoke. Altria may be thought of as a stodgy, slow-moving stock performer, but it's posted a total return of more than 100% during the past five years.
Brand power is also a huge part of what makes staples companies successful. Case in point: 126-year-old Coca-Cola (NYSE: KO ) . The world's largest beverage company boasts sales of 26.7 billion cases worldwide, including 15 billion-dollar brands. Its iconic brand and stable business afford it a huge amount of leverage when industry disrupters like at-home soda system maker SodaStream (Nasdaq: SODA ) come along to challenge its brand power.
Long-established staples companies have tapped out growth in developed markets, so most of their growth opportunities come from emerging markets. As per capita spending on staples products increases and emerging-market consumers' "wants" transition into "needs," greater quantities of household goods are purchased more often. While Procter & Gamble (NYSE: PG ) already dominates the U.S. male razors and blade market with 70% market share, more than half of razors now sold in India are P&G's Gillette Guard. Over the past decade, overall net sales in India have grown 27% annually. Despite its recent issues, the 174-year-old consumer goods juggernaut remains resilient.
An easy way to own the sector
If you're clueless when it comes to the consumer staples space, then consider exchange-traded funds. ETFs mimic the performance of an index, like the S&P 500, or provide specific exposure to certain sectors. Sector-specific ETFs like Consumer Staples Select Sector SPDR ETF are helpful when you lack information to hypothesize an investing thesis for a particular stock.
Become a better investor
If you bet wrong in the stock market, it could cost you. Instead, develop a strategy for adding all sectors to your portfolio. That way, regardless of what happens in the market, you can sleep well at night knowing a portion of your portfolio will prevail.
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