3/4/2013 2:12 PM ET|
Bubble in safety stocks
These aren't ever going to be crushed, but could certainly stumble.
You have to wonder what the heck is going on with this market that the soft goods and packaged goods stock have gone insanely parabolic in the last few weeks. Their run, which began early this year, accelerated with the incredibly bold purchase of Heinz (HNZ) by Warren Buffett and friends.
The outperformance, which had some validity when the dollar was getting weaker and when the raw costs had stabilized, has gotten downright dangerous now and it's worth pointing out the absurdity of this run and why people have to start being careful with stocks that are often thought of being the place to hide at a time of higher taxes, sequester and another worldwide slowdown led by Europe and followed up by China.
The only truly positive thing that has happened since the love affair began is a decline in the prices of the raw materials in the box, notably corn, but the actual cardboard box itself has gone up in price and the fuel costs, negative to start, have only been exacerbated. So, the overall inflation scenario, thought by many to be a reason to buy, can hardly justify the richness of any of these stocks.
Consider some of these stock prices. Perhaps the most overvalued stock in the whole market right now is Campbell Soup (CPB). This serial earnings disappointer, the maker of Campbell's soups, Prego and Pace sauces and Pepperidge Farms sells at an astounding 16 times earnings despite its 6% growth and now less-than-fetching 2.7% yield. Campbell's took off right after the Buffett-Heinz buy as people regarded it as the logical analogue to the ketchup company and bet heavily that it was next in the merger queue. Plus, the founding Dorrance Family, listed as owning about 17% of the company, might be willing to sell if only because they are about as long suffering as you can get.
I just can't recommend a company with that subpar growth solely on a takeover. I just see nothing safe about owning Campbell's Pork & Beans -- hence it's CPB symbol -- at all, especially given the efforts by Hain Celestial (HAIN) to move aggressively into the natural soup portion of the supermarket aisle.
I also struggle with buying Kellogg's (K). I like the gumption and determined-to-get growth of the management, of this company with its new Pringles brand -- so undermarketed by Procter & Gamble (PG) as well as its Keebler cookies and Cheez-Its franchises, an all-around obesity-enhancing product portfolio. But selling at 15 times earnings with 5% growth? What the heck is that all about? It's not going to be taken over any time soon and I think represents a great place to ring the register. You can always circle back at a lower level, perhaps when it yields more than 3%.
I know that Hershey's (HSY) became a huge favorite and the best performer in the group in the last five years, but I think that the market's now taken this sector to extremes. Do you really want to pay 22 times earnings for a 6% grower that yields only 2%? That's just plainly absurd, especially when gasoline prices, an actual impact on convenience store sales, the best market for Hershey, have to be hurting the chocolate-based company sales.
Has anyone seen the move in Kimberly-Clark (KMB)? The darned thing is extraordinary, a relentless rally that seems to know no bounds. That's how you get a 7% grower to trade at 16 times earnings, which is richer than I have seen any time since 1987. Forgive me, but for this KMB lover that move up is cause for concern. The stock of Kimberly has become a total greater-fool security. Even if it blew away the numbers next time, I don't know if its most recent spurt can be justified.
Coca-Cola (KO) and PepsiCo (PEP) are duking it out for the most overvalued in the carbonated soda group and it is tough to figure out how you can pay more than twice their growth rate, which is the case with both, without some further good news or acceleration the next time the companies report.
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Of course, neither has that 3%-plus yield that had supported them at lower levels. If I had to, I would choose PepsiCo over Coke because of its snack food division, but if I were to start buying I would leave plenty of room for the stocks to fall..
I accept that two turnarounds warrant expensive multiples: Johnson & Johnson (JNJ) and Procter & Gamble, with JNJ being the cheaper at 14 times its 8% earnings growth, while PG trades at the outer limits PEG ratio of 2 times the growth rate. The Procter transformation is a cost-cutting one. The JNJ could be about a pending break-up. Either way they need to cool off, too, although my charitable trust owns PG and we are reluctant to sell it simply because we don't have enough of a group that doesn't want to obey the Newtonian rules of stock investing.
I am willing to buy into the idea that the new Conagra (CAG), following the Ralcorp acquisition, will accelerate this 5% grower to something much hotter. That said, the rally's been a huge one. Ralcorp does trade at a multiple point lower to the group right now, but that's cold comfort of some of the group come off their highs. That once-bountiful yield won't provide much support given the run it's had.
To me, the only two stocks that aren't totally outrageous, just merely expensive, vs. historic levels are Clorox (CLX) at 19 times and General Mills (GIS) at 17 times the 10% growth rate they each have, but both are bumping up against the constraints of packaged goods valuations, even in a declining-goods inflation scenario.
But for a moment, compare these multiples to what the much-faster growing healthcare companies -- without much Washington impact -- are trading for. Stryker (SYK) weighs in at 22 times earnings with a 15% growth rate, AmerisourceBergen (ABC), at 15 times with a 40% growth rate, A real bargain, and Covidien (COV) at 14 times earnings with a 28% growth rate. Let's see, body parts, drug distribution and medical devices, all high-growth industries with multiples that are lower than the packaged goods business, yet every bit as consistent, if not more so, given some of the price increases the food companies have put in during the last few years.
Or go the other route of Dover (DOV), Eaton (ETN) or Parker-Hannifin (PH), three leading industrial conglomerates are all trading at price-to-earnings at just a few points above their long-term growth rates, growth rates that include the great recession. I find those rates as every bit as sustainable as the packaged goods, but you are paying much less for the earnings of companies that might be every bit as safe, if not more so.
What can we make of all of this? It's pretty simple. Just when it makes little sense to pay up for safety given the secular trends of increased lending and burgeoning housing, people are willing to presume that the steadier growers in the marketplace are either going to accelerate in growth, which I regard as highly unlikely, or that the cyclicals, which have developed a pretty steady earnings growth themselves, are going to stumble in the next few months.
I think that's a sucker's bet. It's time to take profits in many of the most overstretched safeties and to roll into what's regarded as risky, given that the prices of the consumer packaged goods are now valued well in excess of their historically levels and are ripe for a fall.
People keep thinking there are bubbles all over the place. The only bubbles I see in this market right now are in the safety stocks and, while they aren't ever going to be crushed given their high-quality businesses, they could certainly stumble vs, sectors with much higher growth rates and much lower price-to-earnings multiples.
Jim Crameris a co-founder of TheStreetand contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long PG.
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