Safety stocks playing catch-up
With the Dow up 10%, it's natural to consider a move into consumer staples. But once they catch up to the rest of the market, they may underperform.
That's what people are starting to talk about when it comes to staples like Procter & Gamble (PG), Colgate (CL) and AstraZeneca (AZN) as they report just so-so numbers and then rally as if they got it right.
Of course, they don't rally hard. They go up 38 cents here and 42 cents there. But on a day like Monday, they were on display doing some terrific things versus riskier stocks like Caterpillar (CAT) and Apache (APA) that really gut-shotted your performance.
Anyone running a diversified portfolio wants to be in some of these. I am no different. I like Coca-Cola (KO) very much. At the right price I would like PG and Unilever (UN) and maybe Kimberly-Clark (KMB), certainly Altria (MO). But they are no longer at those prices. In fact, this rotation has moved them up to where unless you got a definitive break in commodity prices you could end up underperforming from here, because, alas, I think these moves are just catch-up moves to the rest of the market.
Look, the moves worry me, as I like the recovery names. They cut costs, and they have pricing power. The staples have cut costs rather marginally and have no pricing to speak of. In a period when the Federal Reserve starts tightening -- something people believe will happen sooner rather than later -- these stocks have almost always underperformed.
You can't just hold on to them in an economic expansion because their earnings comparisons will be miserable versus CAT or Cummins (CMI). They do have emerging-market exposure, but they have to spend a ton of money to get it and it can't offset the meager growth they have in the developed world.
Plus, the 3% yield most of them give you won't mean much when the Fed raises rates, especially when you know they don't have the pricing power to move their dividends up big.
There's research showing that safety stocks can always do well over time -- again, a reason to own some in a diversified portfolio. But they are never going to give you what CAT just gave you or can give you. They can't. And in a world where the U.S. hasn't kicked in yet, all that could happen is that the comparisons to the hard-goods stocks could grow worse, not better.
Still, I accept the fact that people have gotten more conservative. The Dow ($INDU) is up 10%. At the beginning of the year I predicted we could go up a little more than 13%. I am not backing away from that now. I just have to point out that people who believed, as I did, at the beginning of the year, are now worried that they are being greedy. The go-to place if you think you are being greedy would be PG or PepsiCo (PEP).
The issue, of course, is that raw costs must come down for these trades to work. It is not enough that the dollar stays weak.
I think, right now, that's too much to ask, and the gains in these stocks are ephemeral. I want them, but I just think you will fall behind after these names are finished catching up, because, in the end, if they keep raising prices, volumes will fall. They can all end up like Perrigo (PRGO) and Ralcorp (RAH) in the end, knocked off their pricing pedestal by the other white-label guys.
Try knocking CMI or CAT or Deere (DE) off their pedestal. There is no Perrigo for trucks and tractors.
At the time of publication, Cramer was long Caterpillar, Cummins, Deere, Apache and Coca-Cola.
Follow Cramer's trades for his Charitable Trust.
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