Bubble in safety stocks

These aren't ever going to be crushed, but could certainly stumble.

By Jim Cramer Mar 4, 2013 10:12AM

thestreet logoArrow Down Photodisc SuperStockSafety last?

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.

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.

 

Cramer

 

 

Jim Cramer is a co-founder of TheStreet and 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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25Comments
Mar 4, 2013 11:20AM
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Contrary to what you say, Cramer, there are bubbles everywhere in this market. It´s a market of crooks, insiders using information criminally. Burger King is acquired, then Heinz, and there are people buying options that rise 20 times overnight. Buffett teamed up with crooks, that´s why.
Mar 4, 2013 12:46PM
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About 15 paragraphs of nothing ....just throw some names out there so he can point back in the future and say ...."as I mentioned in my column back in March......" and imply that he made a call that came good ....

I think in the 10 years he has been on tv he has made buy calls on about 90% of the Dow/Nasdaq ......amazingly though his aa portfolio seems to suck year after year ...

And let's not forget his warning to stay out of the market when the Dow was at 8000 !!!  : )
Mar 4, 2013 12:57PM
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High unemployment has given cover to many sections of this market.  Mainly because high unemployment has degraded labors ability to demand higher wages.  It also has disguised inflation. That doesn't mean inflation doesn't exist it means it is like high blood pressure.  You don't actually see it until it takes a direct toll like a heart attack or kidney failure.  High inflation is all around us and for those of us who remember the late 70's. it will carry huge political capital.  When Americans finally turn off their cell phones,  turn down the volume of their flat screens, see that their lifestyles have been massively degraded and the stories that all is well the liberal media attempt to deliver from Washington are indeed without merit then watch out. .  High unemployment disguises many ills, but they are serious ills none the less.  Especially when you have this complicit media that has lost much of its' social conscience.  This market seems; at least for the moment, the place smart folks can hide somewhat from inflation. If you see the list of the worlds billionaires many have increases in their massive net worths primarily from market increases.  But as most of us with gray hair know the fox hole idea is only good until it isn't large enough to hide any more people. Which I guess is Jims main point.
Mar 4, 2013 1:40PM
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please don't forget aapl at 700...aa dow stock of the year at 18....gold at 1700...........

this hack is a crook..........how else could he keep his job with his continuous bad advice

 

BEWARE THE PUMP AND DUMP

Mar 4, 2013 10:55AM
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Huh? Swish this around... Central Banks globe-wide have increased the amount of currencies from approximately $60 Trillion about 15 years ago, to over $1 quadrillion today. All that fiat cash covered everything from hyper-appreciation in housing to hyper-appreciation in stocks to filling bonds with fiat fluff.  Literally, putting your own fiat cash into these vessels is toxic now- because wherever it goes, that bubble will burst. Gold? Nada. Guns and ammo? Not. Where do you go when the world is going to Hell because Ivy League morons Jonesed-up on greed, took us past the Point of No Return or Correction? You build yourself an alternative cash-flow, not put it on anybody's bandwagon.  All those roads lead to same destination. Buy a hand basket. Anything requiring massive dynamics is doomed because there won't be structure shortly. Decomposition occurs when fiat money strangles Main Street and erodes the fiber of family existence. Happens in cycles, go READ a history book not try to tune it in on a cable TV channel. Cash isn't king, thing makers are kings. Things you need and can sell locally. It isn't rocket science. The walk out of New York is almost impossible, but the walk from most garages to any local storefront merchandiser is actually healthy for you. Ask not what you can do for your country, LOOK at what's been screwed up and ask yourself- what can I do to fix it or exist once platforms collapse in the convenience bubble finally pops?   
Mar 4, 2013 11:28AM
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People are stocking up for a riot/war scenario. That´s why they buy canned soup, canned meat and canned veggies. They also buy bottled water, matches, guns, and whatever helps them to survive in a catastrophe situation. There are grave situations edging to a complete meltdown and a political gridlock at the same time, impeding any solution. Nobody talks actively about Social Security, Medicare and Medicaid, projected to reach gigantic deficits in just a few years. 
Mar 4, 2013 10:51AM
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 "the incredibly bold purchase of Heinz by Warren Buffett and friends."

 

There's a brown spot on your red nose there Bobo.
 

Mar 4, 2013 4:41PM
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Unless you are in the market for the short term this is worthless advice like 99% of his other articles. HE says sell stability and buy the risk at what may be the top of this bubble. Just one example from earlier last year... buy FB  over something like BRK.B.  Since then FB down 27% and BRK.B up 27%. In the long run slow and steady will come out on top. 
Mar 4, 2013 10:46AM
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After friday's positive close manipulators once again left very peed off for the weekend so come as no surprise that they came out this morning with guns blazing selling all they can sell....We were expecting it; these crooks will never give up, that's a no brainer...Still early of course...The bad thing is that again the volume is low and we have plenty of these cheaters....We will see how things develop...More later.
Mar 4, 2013 4:12PM
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AS long as Helicopter Ben keeps printing huge and dangerous amounts of money, this stock market bubble will continue.  Thumbs up if Bernanke is an even bigger buffoon than Alan Greenspan
Mar 4, 2013 2:00PM
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Another view of a Crystal Ball

The Left says SS and Medicare are needed and should be altered. The Right says the people should be using and living with their own 401Ks.

Washington should understand that the NASDAQ and the S&P500 are just not big enough for the required 401Ks without turning them into one big PONZI scheme. As well as SS being one big PONZI scheme. Try looking at a “Gray Hair Disability Act” to force employers to hire 60-70 year olds. Would you like to see the 401k PONZI Bubble Depression?

Do not worry, current Political path says you will see PONZI and PONZI hard.  

Comment, Alter and Pass it on

Mar 4, 2013 4:23PM
Mar 4, 2013 4:03PM
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Repeat after me:

"The bubble is in bonds"

Mar 4, 2013 1:37PM
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We were hoping to keep things stable, down a bit but stable, unfortunately at about 1220 hrs manipulators started to accelerate the selling so we are dropping quickly....May be a crappy afternoon...Play it safe...We shall see...More later.
Mar 4, 2013 10:46AM
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so rather than picking the "safe" stocks, pick their nearest competitior.  same sector, lower price competitor
Mar 4, 2013 6:16PM
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The market showed resiliency once again, new money was welcome the last 45 minutes or so...As you may guess manipulators not in a very good mood...Oh well, they always have tomorrow...The rest of this week will not be as pleasant, at least we don't believe so...Jobs report on friday.
Mar 4, 2013 12:05PM
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With the Markets being down...They are following the World Markets today..

Not manipulators...

And everyone is still sorting out the Sequestor...

 

Strangely, we are gaining in FMV overall, and it's not Gold..?

But this is nothing new, with good diversity...

Mar 4, 2013 11:59AM
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They are throwing out the Safety Stocks again....hmmmmm.?

 

Seems like they did this, awhile back...Entering our Recession of 2008-2009; They were only about a year late the last time.!!

 

Personally I don't believe we are headed for what some would term as a "double dip", but corrections, why not.?

But no one has come up with the correct time to sell...

 

Much like the last time, everyone was caught off guard, until it was a, "I TOLD YOU SO."

Yup say it enough, and sooner or later "some year" it becomes correct.

Mar 4, 2013 12:06PM
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WoW! You have got to watch this. Seriously! There is and will not be a recovery without a strong middle class and THAT middle class is Gone.
Hold onto your britches when you watch this short video. We are SO screwed it aint funny.

http://youtu.be/QPKKQnijnsM

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