These 4 "Safe" Stocks Took a Big Tumble Friday

Stocks finished the week on a mostly higher note, with only the Dow Jones Industrial Average (^DJI 0.38%) failing to participate in a broad-based rally. The Nasdaq Composite (^IXIC 1.12%) posted the biggest gains, building on its rebound from earlier in the week, while the S&P 500 (^GSPC 0.83%) settled for more modest gains.

Data source: Yahoo! Finance.

Investors generally have the idea that some stocks are riskier than others. In particular, many technology stocks seem to move more violently than the overall market, while stocks in quieter industries like utilities often have gentler moves.

Yet the idea that there are safe stocks versus risky stocks can get you in trouble if you don't take a stock's price in the proper context. Many investors in consumer products giant Clorox (CLX 0.79%) learned that lesson the hard way on Friday, and the decline took the shares of three of its peers lower as well.

Clorox gets bleached out

In a week with some major individual stock volatility, few would have pegged Clorox to be a candidate to lose 14% in a single day. Yet that's exactly what happened on Friday, as the maker of cleaning products and other household items posted its fiscal second-quarter financial report .

Clorox's numbers showed a sharp reversal from its pandemic-boosted results from the previous year. Quarterly revenue was down 8% to $1.7 billion, as unit sales volume tumbled 10% year over year. Higher manufacturing, logistics, and commodity costs caused Clorox's gross margin to plunge from 45% to 33%, and adjusted earnings of $0.66 per share were down by two-thirds from year-ago levels.

Image source: Getty Images.

The chief culprit was the health and wellness segment, which saw a 21% drop in segment sales and 77% lower pre-tax earnings. By contrast, revenue was slightly higher in the household and lifestyle segments, and international sales were flat year over year.

Unfortunately, CEO Linda Rendle doesn't expect the cost pressures that Clorox is facing to let up anytime through the remainder of fiscal 2022. The company projected sales to decline 1% to 4% for the full year, with adjusted earnings of $4.25 to $4.50 per share down roughly 40% from fiscal 2021 levels.

Rendle believes that Clorox's long-term strategy is still sound and will lead to a stronger competitive position, but it remains to be seen whether moves to accelerate pricing responses to higher costs will prove effective. Until investors have more clarity, it could be hard for Clorox's stock to recover.

High valuations in defensive names

Part of the problem facing not only Clorox but also the rest of the consumer products space is that investors have been willing to pay high prices for perceived safety. Even after today's drop, Clorox stock trades at more than 30 times the upper end of the company's forward earnings guidance for fiscal 2022. For a stock with few large growth prospects, that could be unsustainably expensive.

The same is true for some of Clorox's peers, which also lost ground. Kimberly Clark (KMB 5.33%) fell almost 3%, and it arguably has one of the more attractive valuations at roughly 22 times 2022 earnings estimates. Colgate-Palmolive (CL 0.14%) lost 2% but still has a price-to-earnings ratio above 30, and industry giant Procter & Gamble (PG 0.26%) dropped more than 1.5% with an earnings multiple of 27.

Consumer products companies have a reputation for being stalwarts in times of trouble. But that doesn't mean they're immune from high valuations. Given where Clorox and its peers trade, the consumer products industry might not be as safe as most shareholders believe.