There is some wacky stuff going on in U.S. stocks this week. The unthinkable has happened, energy, material and mining stocks have absolutely ripped, as have some industrials, while high multiple crowded trades like Facebook, Google, Starbucks and Home Depot are getting drilled. I can’t tell you that this is a healthy rotation, despite the fact that I think it makes sense for the latter group to chill a bit, the dash for trash in materials and miners has a fairly classic bear market rally feel to it with out any fundamental change. Possibly these stocks overshot on the downside near term, as sentiment was horrendous with short interest nearing danger levels.
Aside from high growth high valuation stocks taking a bit of a breather, there has also been a noticeable decline in consumer staple stocks like Mondelez (MDLZ) and Clorox (CLX) that have had sharp declines following earnings and guidance that did not match investor expectations.
Shares of MDLZ are down about 10% in the last two days, with the stock trading at levels not seen in 10 months. Taking a look at the 10 year chart, it would appear the stock has some more downside given its exposure to emerging markets and the dollar strength adversely affecting their sales, more than 70% which come from outside the United States. And it’s a great example of investors overpaying for no growth. The stock trades 21x expected 2016 eps growth of 2% on a 12% sales decline and a dividend yield of less than the 10 year Treasury yield. I suspect $34/$35 is the next stop a re-test of the long term uptrend:
And CLX, don’t even get me started. The stock is down 5% following its results, but only down 2% on the year, having just made a new all time high on Monday. CLX trades 25x 2016 earnings that are only supposed to grow 8%, despite 1% sales growth, with a dividend yield of 2.5%. What are investors paying for this thing?? Yeah, yeah, about 80% of their sales come from the U.S. and their products are truly staples and thus defensive, but this stock is expensive, for just ok yield and little growth. CLX should pull back at least to its 200 day moving average near $116, which also corresponds with the stock’s uptrend from late 2014:
On Friday’s Options Action on CNBC, I laid out my near term bearish thesis on consumer staples stocks, expressed through a trade in the etf XLP (here).