This whole ZIRP & NIRP thing is wreaking havoc on conventional investment wisdom. Investors are willing to pay 22.5x expected 2016 eps for Coca-Cola (KO), a consumer staple, with a 3.2% dividend yield, whose earnings are expected to decline 3% yoy, with sales expected to decline for their 4th consecutive year, down 4%, with shares out-performing the S&P 500 ytd.
On the flip-side, shares of a cyclical stock like General Motors (GM) trade at less than 5x expected 2016 eps growth of 13%, on a 2% yoy sales increase, sporting a dividend yield of 5.5%. But the stock is down nearly 20% on the year, massively under-performing the S&P 500.
While this is just one example, the anecdotal take-away is not all dividend payers are created equal in investors’ minds. Domestically focused groups like Telcos & Utilities have clearly been tops on many lists given their staple status combined with 100% U.S. revenue exposure that avoids any dollar fluctuations. And it has a fat dividend yield. Consumer staples like KO & Proctor & Gamble (PG) are deemed defensive because of the nature of the products they sell. But that’s not much help when their reliance on growth from overseas exposes them to a strong dollar and makes them particularity vulnerable. What gives with Industrial sectors like Autos? Specifically a stock like GM with a fat dividend? Well, it looks like it’s being priced for a global recession.
This discussion does not make me want to buy Autos. It only reinforces my bearish thesis on staples (read KO & PG here and here). But what it does do is make me seriously wonder if investors are too crowded in certain trades. There seems to be some inherent risk in owning expensive consumer staples merely for yield, with most not far from their all time highs, and most already trading at a steep premium to the broad market.
And all of that leads me to a trade in the options market that caught my eye today in the etf that tracks the Consumer Staple sector. When the XLP was $53 shortly after the opening, there was a buyer of 10,000 of the Jan17 48 puts, paying 1.25 to open. These puts break-even at $46.75, which would be down a whopping 12% in about 6 months from the current trading level.
If this is an outright bearish bet, or possibly a hedge against a grouping of consumer staple stocks, the chart of the XLP from its 2009 lows might explain the choice of strikes. The long term uptrend converges very near technical support at $48, with little support below:
[caption id="attachment_64687" align="aligncenter" width="600"]
XLP since 2007 from Bloomberg[/caption]
I know I know, investors have to put money somewhere. I have been an advocate for more than a year that cash isn’t the worst alternative for money some would consider putting into the market near the highs (despite low interest rates). The economic and financial market backdrop for the risk/reward of investing new money in equities seems to get worse by the day. The very mediocre results of the broad market, and the poor breadth does little to change my view of the last year. It doesn’t make me correct either, because multiple correction attempts have been bought. But only time will tell.