Play Portfolio Defense With This Consumer Staple Stock

The S&P 500 is in danger of finishing in the red for full-year 2018. But in the past three months, the consumer staples sector has outperformed all other sectors, a clear signal that institutional and retail investor are rotating some of their holdings into quality names.

In an Industry Focus podcast dedicated to defensive plays in a jittery market, we put forward reasons to consider buying retail behemoth Walmart (WMT 1.46%). Among these are the company's extremely aggressive posture in defending its retail market share from Amazon.com (AMZN 3.20%), as well as its new, quiet focus on buying hip retail companies beloved by millennials. Click below for a refreshing take on a relatively safe investment with surprising growth potential.

A full transcript follows the video.

This video was recorded on Nov. 13, 2018.

Vincent Shen: I want to make sure we have time to cover Walmart. I feel like this is a gold standard for a consumer staples retailer. Going back to 2008, that year and I mentioned and the lead-up to the financial crisis, the lows reached during that time, the S&P down 40% for the year. Walmart was actually up 18% that year. Just a single data point for you to consider.

More recently, this is a story that I think shares a lot of similarities with McDonald's. Management's focused on growing its e-commerce arm. They're focused on investing and acquiring all these new businesses and taking generally more market share. It's a long-term focus that I like to see, even if it means that there's going to be a near-term hit to profitability in the next fiscal year or two. It's a focus that seems like management at both of these companies -- McDonald's and Walmart -- are taking on. I think it'll be good for shareholders looking out five, ten years and further. What are your thoughts here?

Asit Sharma: Longtime listeners will remember that we devoted an episode to Flipkart, which was Walmart's great e-commerce acquisition. That's the up-and-coming e-commerce online operation in India. One thing that's really caught my eye since that show is Walmart's attention to, again, millennials and Gen Z. It's invested in a number of brands. I'll read a few. Bonobos, ModCloth, Moosejaw and ShoeBuy. These are non-traditional categories for Walmart. It's investing where millennials are shopping and in the brands that millennials like. It's also really ramped up its own private label offerings. Fashion turns out to be a large opportunity in the economy in good years and bad years. Walmart, in doing this, is extending beyond that brick-and-mortar, away from what jet.com, another acquisition, brings it, which is a quasi-competitor to Amazon, and more of an individualized, stand-alone concept with each of these brands that it acquires. It's diversifying that base out. Of course, when your revenues are in the several hundreds of billions of dollars a year, it takes a long time for an effort like this to provide diversification. But we've seen it acquire delivery companies, logistics companies, waging this multi-front battle with Amazon. I would urge listeners to look beyond Amazon to a future where retail stores still exists, consumers are still going into Walmart stores and buying products which you today might not associate with this company.

I also wanted to note, in the most recent quarter, Walmart's U.S. comps rose 4.5%, which was the best performance in ten years. I believe they're reporting results on the 15th of October in just a few days. We'll get to see if that trend continues. It's a long-term classic defensive play, but again, there's a growth story in here that's starting to emerge.

Shen: Thanks, Asit. We have like two more minutes, so I want to give you an opportunity. With this broad conversation that we've had on the idea of consumer staples as defense during market downturns, what's a big takeaway you want to leave our listeners with?

Sharma: The biggest takeaway, we really haven't mentioned this, but it's probably a question that many listeners have as we pull to the end of this show. If I buy these stocks tomorrow, am I just going to suffer another big downturn, as I have with other names in my portfolio? My answer is, we might. You never know how low the market can go when there is a bear market. However, each of these companies is grouped around 21X forward earnings. That's fairly cheap, given today's market. The only outlier is McDonald's, which is trading at 24X one-year forward earnings. Take TJX, even with its 42% rise, it's still comparatively cheap when you look at the broader market. You have some true defensive muscle in here. I would urge listeners to explore these and other big quality staple stocks in more detail, and maybe start nibbling, adding some defensive positions to their portfolios.

Shen: Reiterating some of the warnings that we had, the takeaways that we had when we talked about what's driving the recent volatility -- this was two weeks ago on the show. Panicking: not the right move. Selling out of everything: not the right move. You're in a position right now to think about your portfolio. If you're worried about something like this, like a downturn, consider: am I diversified? If you're not, these are the kinds of sectors and companies that you can look at to help bolster things. That's just one of many routes that you can take.