What You Need Has Never Been Cheaper vs. What You Want:

This piece updates our last post on investing in staples

  • The chart below shows the market cap of Consumer Staples to Consumer Discretionary stocks is now at a record low
  • Wall Street is obsessed with IPOs, SPACs, and chasing quick profits
  • We believe Staples’ history of compounding wealth safely is underappreciated today
  • Chasing sales growth, many “story stocks” are priced for perfection and may disappoint
  • We believe people will still smoke, drink, eat, clean their homes and put their kids in diapers for decades to come

Our pieces “The Case for Buying What You Know and Need” and “Income Investing: Staples & IT” provide a deep dive into the case for investing in a select group of staples today.

Staples Market Cap as a Percent of Discretionary

Consumer Staples Sector: A Safe Haven in Storms

These are the days of miracle and wonder for stocks with complicated businesses that do exciting things. We have written a great deal about the speculative investment frenzy underway. We are updating this post to make our case for proven companies that make stuff you need to buy.

What is incredible to us is that consumer staples stocks are largely household names. Brands include Coca Cola, Procter & Gamble, Kimberly-Clark, Hershey’s and many others that you see in supermarkets if not in your home. What defines these firms?

Consumer Staples Industry Analysis Made Easy

For in-depth work on why we believe staples are so compelling today please see our white papers linked at the top of this post. In those pieces we do deep dives into the industry’s dynamics. We also share proprietary work that makes the case that staples’ stocks dividend yields, and historically stable businesses are particularly appealing in speculative periods like today.

As we showed in our post, staples stocks are as cheap relative to the market as they were at the peak of the dot.com mania. We also showed in another quick post that staples stocks have been a very stable method of growing your wealth.

For our purposes here, we are merely going to compare and contrast one of the most loved companies in the stock market today with some of the largest staples stocks. In a recent CFTC, we wrote up market-darling, Twilio. In that post we discussed how this firm, which now has a $64 billion market cap lost $700 million dollars on sales of just over $2 billion. How absurd is that compared to the sales and profit engines of consumer staples? Let us show you!

Consumer Staples Sector Looks Like Quality at a Reasonable Price to KCR

In the exhibit below you can see the name, market cap, sales, profits, and dividend yield of the top 30 staples stocks according to the Vanguard Consumer Staples ETF. We sorted by market cap and then stuck Twilio in there in red. The stocks are sorted by their market cap. The largest one being Walmart which has a $403bn market cap, sales of $566bn, profits of $13.5bn, and pays a 1.5% dividend.

Look where Twilio is on that list. At $64bn that thing is bigger than Colgate Palmolive, Keurig, Kraft Heinz, and 3x bigger than the company that makes much of America’s cereal, Kellogg! KCR thinks this is an incredible example of the madness underway today.

Staples are Simple, Proven, Profitable & Pay Dividends

Firm Name Market Cap Annual Sales Net Profits Dividend

We do not write this post to pick on the one tech stock we put in that list. We understand that investing in a food company or a stock that sells consumer care products is hardly exciting.

But in KCR’s view, investing is the business of making your savings work for you and not the business of buying things you don’t understand, are expensive, lose money and then hoping they go up! The recent year over year gains in the S&P 500 and mutual funds that specialize in buying “innovative” stocks have been incredible today.

Price targets on companies that lose money seem to move ever higher. Analysts and investors have forgotten the basics of investing in our view. The good news, as we have documented extensively, is that some of the most proven and profitable firms in the market today are cheap. This is particularly true on a relative basis. As we explained, based on history, staples stocks may also help hedge rampant food inflation.

Look at these staples stocks. We cannot be sure, but in 10 years we believe Clorox will be making bleach and trash bags and the world will still be consuming sodas and snacks from Pepsi and Coca-Cola. At the other extreme, we have absolutely no idea if some of today’s loss-making tech stocks will even be in business a decade from now.

Look at this staggering chart of the market cap of stocks that lose money. As we have documented ad infinitum, investing in speculative and loss-making firms has never ended well. Sure, people will point to something like Amazon and highlight that as an example where we are wrong. Read our piece Who is the Next Amazon? This Post Will Change Your Life to learn about the odds you can figure that out.

As we have detailed, exchange trading of some of the market’s lowest quality stocks has hit levels last seen at the peak of the internet bubble. The similarities with the dot.com period are incredible. In every bubble, investors believe that “this time is different” and, as we explained in our quick takeaways from Galbraith’s A Short History of Financial Euphoria, in hundreds of years it has NEVER been different.

We believe the risks to investors today are at crisis levels. Low bond yields and soaring fad stocks have conspired to suck people into stocks we believe will end up collapsing. Meanwhile, investors can buy some of the highest-quality stocks in the market with proven operating histories and healthy dividends at reasonable if not cheap prices.

The below table highlights the basic fundamentals of both Staples and Discretionary stocks today. You can see the disparity in both valuation and quality is evident. Staples offer investors higher quality and 4x the yield for ~1/2 the valuation. While we are not big fans of beta, we would note that these stocks have a long history of outperforming during times of stress. Today, Discretionary have 2x the risk of Staples stocks.

Staples Discretionary FCCF to EV Price to Sales EV to Sales Price to Earnings

We believe our top picks can meaningfully enhance the benefits highlighted at the sector level above.

For a complete list of KCR’s Ranked Staples stocks, please click here.

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