Daily Gains Letter

Consumer Staples No Longer a Buy in This Market

By for Daily Gains Letter |

Consumer Staples No Longer a Buy in This MarketThe Procter & Gamble Company (NYSE/PG) is likely a company that a lot of people have in their stock market portfolios, whether they’re saving for retirement or are actually in retirement now. It remains a great business with solid potential going forward.

On the day that Procter & Gamble released its first-quarter earnings results, the stock dropped about $5.00 a share, or six percent. The company revised its 2012 second-quarter earnings lower to below previous Wall Street estimates; top-line growth was anemic.

On the stock market, Procter & Gamble just came off a new all-time record high. The company currently has a price-to-earnings ratio of 17.5 and boasts a dividend yield of three percent.

This blue-chip company has proven to be worth accumulating when it’s down, but the stock is still way up and not quite yet in the buy zone. A full-blown stock market correction should bring this position much lower; then it would be the kind of opportunity to consider with new money.

Another stock that’s likely to be in many retirement portfolios is Colgate-Palmolive Company (NYSE/CL), which has been doing exceedingly well since the beginning of this year. The company reported first-quarter earnings that met Street expectations, and the stock market’s reaction was positive.

Consumer staples stocks are always welcome in a retirement portfolio, or any stock market portfolio with an adherence to risk and capital preservation. It is true, though, that all stocks are risky assets; no matter what, even the most stable companies can experience major downturns, because they are equity securities.

Procter & Gamble had an earnings miss at the height of the stock market bubble in 2000. After the stock lost about half its value, the position took a good five years to recover and break through its previous high.

One consumer staples stock that recently reported very good earnings results is the Kimberly-Clark Corporation (NYSE/KMB). On the stock market, this position is trading at a new all-time record high, with a current price-to-earnings ratio of 22.5 and a dividend yield of 3.1%.

As a group, consumer staples are looking ahead of themselves right now. They’ve been a favorite of institutional investors for the last several months, as evidenced by the huge stock market run-up. Many Wall Street analysts view the sector as being lofty in terms of valuation, and I have to agree; the group is due for a major pullback.

Also being referred to as expensively priced on the stock market are utility stocks. This is another group, of course, that is a favorite among those who are saving for or are in retirement.

The big run-ups in both utilities and consumer staple stocks illustrate the jitters that institutional investors have for the prospects of the broader stock market. Furthermore, their elevated valuations on modest earnings also make it a difficult environment for individual investors to be considering new positions in these kinds of companies right now.

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