U.S. consumer staples stocks (XLP) are the second best performing sector in the S&P 500 (SPX) in 2016, up 5.5%, behind Utilities (XLU) which are up 13%. Despite mildly under-performing the SPX’s 200% gains from the financial crisis lows in March of 2009, the XLP has broken out to new all time highs in the last couple months after a long consolidation in 2015:
The out-performance is likely the result of easing U.S. dollar headwinds for its multi-national components in 2016, and investor interest in stocks/sectors deemed defensive that offer a relatively high dividend yield. There is one problem with this positioning though, while the dollar’s (DXY) nearly 4% ytd decline has served as a tailwind for the last few months, large components like Proctor & Gamble (PG) and Coca-Cola (KO) still expect much of their future growth to come from emerging markets, which are showing weak demand at the moment. And there is a little matter of what one is willing to pay for yield and defense. PG which makes up 11.5% of the weight of the XLP is expected to have earnings and sales decline middle single digits in calendar year 2015, and the stock trades nearly 23x expected earnings, very near a 10 year high. And KO at 9.5% of the XLP’s weight, is expected to have 3% and 4% earnings and sales declines respectively in 2016, and the stock trades at 24x expected 2016 earnings, also near a 10 year high. And that dividend yield at 3.25% for PG and 3% for KO, nearly double that of the 10 year treasury yield currently at 1.75%, well above the SPX’s 2.2% and add in the combined yield from buybacks, and investors are spotted a nice head start.
These stocks are not exactly my cup of tea, but it’s hard to argue the case for hiding out in them in the current uncertain investment environment. And if you are in the camp that the dollar is about to retrace a good bit of the move from 2014, then company’s like PG & KO which get more than 60% of their sales from outside the U.S. should continue to outperform.
I would not be chasing shares of KO here, the stock has already broken out to new all time highs after a few year consolidation:
But PG, looks poised for either an epic breakout, or a failure below near term support at $80:
Backing the chart out a bit, there are so fairly obvious near term technical targets, breakout level just above $85, and the prior all time high made in late 2014 just above $94, with the Jan low of $75 as near term support:
Nearly a month ago we detailed how to be long KO for a breakout while defining risk with the in the money May 45 calls. Similar plays make sense for those looking to play breakouts in other staples or replacing stock at such important inflection points.
PG will report Q1 earnings on April 26th, the options market is implying only a 2.5% move in either direction between now and April 29th weekly expiration, that is basically in line with the 4 qtr average post earnings move. Options prices look cheap, especially when you consider that the April 29th will catch potential market volatility into and out of the next FOMC meeting: