Last night on CNBC’s Fast Money we had Credit Suisse’s Chief U.S. Equity Strategist Jonathan Golub on to discuss his continued bullish view on U.S. stocks, while also touching on how he arrives at a constructive view on a defensive sector like consumer staples, despite high earnings multiples in the face of low growth prospects, watch here:
Jonathan’s view on consumer staples can be summed up this way; investors should be willing to pay a high multiple for companies who are not going away anytime soon, that reliably pay a 2-3% dividend, relative to treasury yields (10yr) which have not seen yields meaningfully above 3% in more than 10 years.
While that makes sense to me for those looking to put capital to work in this market with an eye towards being defensive, I think it is important to recognize the under-performance of the XLP, (the S&P Consumer Staple etf) this year, up 7.5%, vs the 15% gains in the S&P 500 (SPX). And the SPX is near its all-time highs, while the XLP has been making a series of lower highs and lower lows since its 52 week highs made in early June.
On a one year basis the chart of the XLP looks like a mess, with the recent bounce from support dating back to the start of the year propelling the stock back to the downtrend from the June highs, which could serve as near-term technical resistance:
Taking a longer-term technical view though, the XLP bounced this past week right at the uptrend that has been in place since 2010:
Depending on your fundamental view of the sector and you broad market view on valuations, that bounce might seem like the sort of thing to press to the upside and play for new highs or fade and play for a break.
The top five holding in the XLP make up nearly 50% of the weight of the etf: Proctor & Gamble (PG) at 12.7%, Coca-Cola (KO) at 10%, Pepsico (PEP) at 9.1%, Philip Morris (PM) at 9% and Altira (MO) at 7%.
-PG trades 22x expected 2018 eps, pays a 3% dividend yield and has expected eps growth of 6% on 3% sales growth.
-KO trades 24x expected 2018 eps, pays a 3.1% dividend yield and has expected eps decline of 1% on negative sales growth.
-PEP trades 21x expected 2018 eps, pays a 2.8% dividend yield and has expected eps growth of 7% on 3% sales growth.
-PM trades 20x expected 2018 eps, pays a 4.14% dividend yield and has expected eps growth of 6% on 7% sales growth.
-MO trades 19x expected 2018 eps, pays a 4% dividend yield and has expected eps growth of 9% on 2% sales growth.
The growth rates and div yield vs valuation aren’t horrible, but if interest rates start going up quickly following the Dec Fed meeting, coupled with a comensurate move in the U.S. dollar, investors might start to reprice sectors like staples which has a lot of dollar exposure.
Back in Sept and Oct we detailed and updated a bearish view on the XLP in Dec expiration (read original here and update here). The etf is essentially in the same place so now we want to roll this view (or consider new for those not involved) out to January expiration playing for a check back to trend in the coming months and a break below in the new year:
Trade Idea: XLP ($54.73) Buy Jan 54 / 50 put spread for 70 cents
- Buy 1 Jan 54 put for 90 cents
- Sell 1 Jan 50 put at 20 cents
Break-even on Jan expiration:
Profits of up to 3.30 between 53.30 and 50 with max gain of 3.30 at 50 or lower
Losses of up to 70 cents between 53.30 and 54 with max loss of 70 cents above 54.
Rationale – This has a good risk reward for a return to trend that could take the etf lower towards the short put. If the etf breaks-out above trend the risk is limited to .70 and can be taken off for a small loss. January gives the turn of the calendar year and more potential catalysts for the move to play out.