At the risk of sounding melodramatic, if someone had put a gun to my head at the beginning of the year and asked me which S&P 500 sector would work best in 2009, I would have said consumer staples. And I would have been wrong, so far.
As of this writing, the S&P 500 is down 8.9% and the consumer staples sector is down 9.7%, while technology is actually up 5.5%. I bet no one would have picked technology as the winner, but there it is.
Why choose staples in such a theoretically dangerous market? Well, people always need to eat, drink, smoke, and bathe. So companies like Procter & Gamble
Yet, the sector hasn't paid off lately. This tells me that many of these companies are down for no good reason, other than that money is probably still flowing out of the market. If you sell an index fund position, the fund sells all the stocks in the S&P 500 according to their weight, regardless of the fundamentals. I think a lot of babies have been thrown out with the bathwater in the consumer staples sector, which you can track via the Consumer Staples SPDR
Drink up
Now, Diageo
Diageo is the premier spirits stock to own as it makes primarily premium spirits, wine, and beer -- Johnny Walker, Smirnoff, Guinness, Tanqueray, to name a few. The stock has been hammered recently, taking a double hit from both the overall market's malaise as well as a 25% drop in the value of the British pound over the past year.
Does the pound have more downside? Possibly. I am a big euro bear, and the pound and euro are very much interlinked. But because Diageo exports plenty of its products to the U.S. and elsewhere, a weaker pound may actually help Diageo's bottom line.
The company has seen product volumes decline 2%, as people have economized, but sales in money terms actually rose 3% for the first part of fiscal 2009, and earnings per share rose 21%. That's not bad in the current economic environment.
Target or Wal-Mart?
According to S&P, Wal-Mart
Target, on the other hand, has seen its profits decline recently. In February, Wal-Mart saw same-store sales rise 5.1%, while Target's dropped 4.1%. One key has been the more extensive offering of food and other basic goods at Wal-Mart, while consumers have cut spending on clothing and other less-essential items, hurting Target.
If we are anywhere near the low point of this recession, Target actually might make a better buy as it should see more improved performance as the economy recovers. But that's a very big "if," as, in my view, this is no ordinary recession. With consumers de-leveraging by paying down unsustainable debt burdens, they'll likely give up even some of the most modest luxuries and concentrate solely on things they absolutely have to have.
Until that changes, the recession will likely continue. That should make you focus on consumer staples -- companies that sell things you can't do without -- rather than consumer discretionary stocks.
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