Are Large Cap Consumer Staple and Health Care Stocks Really Recession Proof?

A recent poster on this blog commented on the "Anti-Recession Stocks that can survive a US Slowdown" blog post. The poster said:

Well you were most certainly wrong. Too bad folks like you can't get out of the mindset that just because a company is big and been around a while doesn't mean it's stock will do well.

Let's evaluate the stocks chosen in the previous blog entry to see whether or not the stock selection was wrong. The assumption is that large consumer staple and health care stocks tend to survive slowdowns and recessions.

Assumption: Sector Rotation

But first, let us look at an assumption. Let us assume that a portfolio is 100% in stocks, and whether the market goes down or up, the portfolio manager (you) has to remain 100% invested. In this case, we have to either hold the stocks we currently own, or we have to rotate into other stocks.

Many professional money managers have to do the same. They are supposed to maintain a percentage of their fund in equities, and when the market goes down, they could rotate stocks from one sector to another.

The Slowdown/Recession playbook tells us to rotate into large cap consumer staples and health care stocks as a safer investment to ride out the slowdown or recession.

With this assumption in mind, six stocks were selected in the previous blog post that were "anti-recession." Most are large cap, consumer staple or healthcare stocks, except one, Sun Healthcare (SUNH) which is a small cap health care stock.

Performance of the Stocks

From January 7, 2008 (around the time the previous blog entry was written) to today, July 15, 2008, here is the performance of the stocks:

1. SPY (S&P 500 ETF): -13.47%
   
2. PG (Procter and Gamble): -10.27%
   
3. UL (Unilever): -25.97%
   
4. MO (Altria): -11%
   
5. GILD (Gilead): +15.28%
   
6. SUNH (Sun Healthcare): -17.71%
   
7. PEP (Pepsi): -14.2%
   

All of the results above do not include dividends. If you include dividends, the performance of the stocks above would be better.

In addition, instead of choosing SUNH, we had chosen it's competitor, Kindred Healthcare (KND), the return during this period of KND would have been +20.16% instead of SUNH's -17.71%

The Results

Period: January 7, 2008 to July 15, 2008:


Average of the Six Anti-Recession Stocks (no dividends): -10.65%
S&P 500 Performance: -13.47%


The Six "anti-recession" stocks outperformed the market by almost 3%. In this difficult bear market, outperforming the market is a good thing.

Check Performance Now

Biotech has been breaking out

How Many Blades Can Gillette and Schick Fit on a Razor? When will this growth end?

Have you ever noticed that the number of blades on a safety razor have been increasing at an exponential pace? When will this growth end? How many blades will we have on a razor in the future? When will the arms race between Gillette and Schick end?

The two main players in the Safety Razor market are Gillette (owned by Procter and Gamble (PG)) with the largest market share (70% as of 2003) of the global wet shaving market, and Schick (owned by Energizer Holdings (ENR)), a distant 2nd in market share (18% as of 2003).

In order to achieve greater growth, both companies need to innovate, create new products and provide an opportunity to sell more expensive razor blade cartridges. In the recent past, the companies have increasingly added more razors per cartridge.



In the chart above, we notice the exponential growth of the number of blades per cartridge.

Razor Blade History

1. 1895: 1 Blade: Gillette Safety Razor
   
2. 1971: 2 Blades: Gillette Trac II
   
3. 1998: 3 Blades: Gillette Mach3
   
4. 2004: 4 Blades: Schick Quattro
   
5. 2007: 5 Blades: Gillette Fusion
   

At this rate, will we appear to have infinite number of blades on a razor cartridge in the future.

But is this realistic? The exponential growth of blades in a razor cartridge will eventually end. Does the consumer really notice the difference right now between a five blade razor and an inexpensive two blade razor?

So long as the companies innovate and convince consumers to pay more for the more expensive products, Gillette and Schick will do fine. However, the two companies will need to start finding new ways to innovate without having to put more blades on a razor cartridge. I don't think consumers will really notice the difference between a ten blade razor cartridge and a four blade one.

There is no Moore's Law for Razor Blades, and Gillette and Schick better start thinking of new ways to innovate to maintain their growth.

Anti-Recession Stocks that can survive a US slowdown.

Diversifying your portfolio is often a good idea. Whether we have a Recession in the US or not, each portfolio should have some stocks which hold up during a recession. Often, two sectors mentioned are Consumer Staples and Healthcare.

Here are a few interesting stocks that may be good stocks to hold even when the US experiences a recession.

1. Procter and Gamble (PG)

Everyone around the world knows and uses Procter and Gamble products. They make consumer staple products such as Gillette, Head and Shoulders, Pantene, Crest, Vicks, Oral-B, Pringles, Folgers, Downy, Tide, Bounty, Charmin, and Pampers. This $223 Billion company operates three Global Business units: Beauty, Health and Well-Being, and Household Care. PG has a forward PE of 18.37, 5 year estimated growth of 13, a PEG ratio of 1.41 (reasonable for a consistent growth company), has a yield of 1.9%, and is within range of its 52 week high.


2. Unilever (UL, and UN)
   
   Unilever is a well known and large company based in England and the Netherlands. They provide many well known products including fast moving consumer goods, food, home and personal care. They own the brands Knorr, Country Crock, Ben and Jerry's Ice Cream, Klondike, Posicle, Lipton Tea, SlimFast, Dove, Suave, Vaseline, Close Up toothpaste, Comfort, Snuggle, and Surf. Forward PE is 17.48 and its yield is 2.60%. The stock is within range of its 52 week high.
   
   
3. Pepsi (PEP)
   
   Everyone knows Pepsi brands including Pepsi, Doritos, Frito-Lay products, Ruffles, Quaker Oats products, Mountain Dew, Tropicana Juice drinks, Dole, Rice-A-Roni, and other products. Forward PE is 20, with a yield of 2%. The stock is within range of its 52 week high.
   
   
4. Altria (MO)
   
   Altria is a $158 Billion company that specializes in selling tobacco products (Philip Morris and related brands) and food products, and they used to produce products from Kraft (KFT). However, Altria has spun off Kraft (KFT), so Altria can concentrate on tobacco products. Altria (MO) has a forward PE of 16, and a forward yield of 4.0%. Kraft (KFT), makers of Oreo and Tang, has a forward PE of 16 and a yield of 3.40%. MO is within range of its 52 week high.
   
   
5. Gilead (GILD)
   
   Healthcare is also an important anti-recession sector and Gilead, a $43 Billion Biotech company, is a good company in this sector. They have a good pipeline and produce important products such as Tamiflu and medicines for AIDS related Kaposi's sarcoma. Forward PE is 24, a 5 year estimated growth rate of 17% for a reasonable 1.41 (under 2 is reasonable). The stock is also within range of its 52 week high.
   
   
6. Sun Healthcare (SUNH)
   
   Long term healthcare, especially those companies that cater to the growing population of senior citizens (Baby Boomers will be retiring), is another great anti-recession play. Sun Healthcare (SUNH), a $730 million company, does just that. It has a forward PE of 20, a 5 year estimated growth rate of 24%, for a very good PEG of 0.83 (a PEG under 1 is very cheap). The stock is within range of its 52 week high.
   

So even as the US slows, the companies above should stand to benefit. The companies above are good companies, and most of them are large companies with great international growth and presence. Some even have a decent yield to help cushion your portfolio.

Even if the US stock market does not experience a recession, your portfolio should still have a portion invested in good companies in Consumer Staples and Healthcare, two sectors that should be able to withstand a US slowdown.

Stocks Above 50 Day Moving Average after Drop Today (August 15, 2007)

The Stock market has been experiencing a correction, and the S&P 500 Index ($SPX) only has 7.6% of its stocks above the 50 day moving average. This is very low!

What are these stocks holding up?

I used Yahoo Finance and selected the larger capitalization stocks above the 50 day moving average and above a $4 Billion market capitalization:

1. Procter and Gamble (PG)
   
2. Cisco (CSCO)
   
3. Pepsi (PEP)
   
4. Ebay (EBAY)
   
5. Alcan (AL)
   
6. Las Vegas Sands (LVS)
   
7. Kimberly Clark (KMB)
   
8. Southern Co (SO)
   
9. FPL Group (FPL)
   
10. Celgene (CELG)
    
11. Kellogg (K)
    
12. Garmin (GRMN)
    
13. Broadcom (BRCM)
    
14. Macronix Intl (MXIC)
    
15. Hilton Hotels (HLT)
    
16. LG Philips (LPL)
    
17. Biogen Idec (BIIB)
    
18. Paychex (PAYX)
    
19. Wrigley (WWY)
    
20. Juniper Networks (JNPR)
    
21. Wynn Resorts (WYNN)
    
22. Lyondell Chemical (LYO)
    
23. Nidec (NJ)
    
24. Leucadia (LUK)
    
25. Intuitive Surgical (ISRG)
    
26. Intercontinental Hotel (IHG)
    
27. Hudson City Bancorp (HCBK)
    
28. American Real Estate (ACP)
    
29. Amylin Pharma (AMLN)
    
30. Waters Corp (WAT)
    
31. Tim Hortons (THI)
    
32. Dade Behring (DADE)
    
33. Whole Foods Market (WFMI)
    
34. Barr Pharma (BRL)
    
35. Iron Mountain (IRM)
    
36. Navteq (NVT)
    
37. Dow Jones (DJ)
    
38. Vertex Pharma (VRTX)
    
39. Covance (CVD)
    
40. Trimble Navigation (TRMB)
    
41. Intersil Corp (ISIL)
    
42. LDK Solar (LDK)
    
43. Weight Watchers (WTW)
    
44. Stericycle (SRCL)
    
45. Hansen Natural (HANS)
    
46. China South Air (ZNH)
    
47. Checkfree Corp (CKFR)
    
48. Chaparral Steel (CHAP)
    

I'm not surprised seeing consumer staples companies such as Procter and Gamble (PG) and Kellogg (K). I'm not surprised seeing healthcare stocks such as Celgene (CELG).

As many commentators have pointed out, technology can be good. Ebay (EBAY) is on the list, and Location Based Service stocks such as Garmin (GRMN), Navteq (NVT), and Trimble (TRMB) are good. I'm surprised that Broadcom (BRCM) is on the list.

I also noticed several resorts such as WYNN and Las Vegas Sands (LVS), most likely because of Macau presence and eased Macau rules, and that even in slowdowns, people can still gamble.

Hotels such as Hilton Hotels (HLT) and Intercontinental Hotel (IHG) are also on the list.

I'm surprised by Hudson City Bancorp (HCBK), a Financial. How is this surviving?

I'm also surprised by American Real Estate (ACP). How is this surviving in this market?

Three International Food and Beverage Plays to Get Away from US Credit Concerns

With the United States suffering a credit crunch, people are suggesting that investors get out of financials and into consumer staples, and companies with international exposure such as Kraft (KFT) or Procter and Gamble (PG). While this is a good idea, another good play would be to play sectors which have a very low correlation to US Financials. Why not invest in international food and beverage companies which are more levered to the economy they serve?

Here are three interesting international food and beverage stocks:

1. Central European Distribution Corporation (CEDC):

CEDC is the largest vodka producer in Poland by value and produces the Absolwent, Zubrowka, Bols and Soplica brands, among others. CEDC currently exports Zubrowka to European and Asian markets. CEDC imports many of the world's leading brands to Poland, including brands such as Remy Martin, Metaxa, Jim Beam, Sauza Tequila, Grant's, E&J Gallo, Sutter Home, Torres, Penfolds and Concha y Toro wines, Corona, Foster's, and Guinness Stout beers and Evian.

CEDC is also benefitting from a strong Polish economy, growing at a good 6.4% rate in the 2nd quarter of 2007. They are even getting Russian exposure, as they recently announced their intent to acquire a significant majority interest in a Russian company which owns the number one premium vodka brand in Russia, Parliament Vodka.

This $1.65 Billion company has a Forward PE of 20.48, and a five year estimated growth rate of 17.5% for a reasonable PEG of 1.17. It is near its 52 week high and there are currently only five analysts covering the stock.


2. Wimm Bill Dann (WBD):

Wimm Bill Dann is a $4.14 Billion Russian Food company offering a range of branded dairy, juice, water and baby food products. It has a forward PE of 20.35, a five year estimated growth rate of 35% for an inexpensive PEG of 0.58 (less than 1 is very cheap).

According to the company, Wimm Bill Dann produces its dairy products in the region where they are consumed. Also, from 1999 to 2003, Wimm Bill Dann had modernized. Prior to 1999, Russia suffered a deficit in raw milk, particularly a deficit in high quality raw milk. The number of head of cattle had diminished while productivity had not grown quickly enough. So Wimm Bill Dann invested in modern Swedish milking and refrigeration equipment and later, invested in harvesting equipment. This modernization program reaped benefits greatly increasing the percentage of high quality milk.

Wimm Bill Dann also has a 20% share in the Russian Juice Market (as of 2005).

TheStreet.com's Ratings consistently rates Wimm-Bill-Dann as one of their top five fast growth stocks.


3. Ambev (ABV):

Ambev is a $43 Billion Brazilian company that produces, distributes and sells beer, carbonated soft drinks and other non-alcoholic and non-carbonated products principally in Latin America. It also bottles, sells and distributes PepsiCo International products outside of the United States. The company has a forward PE of 20.76, a five year estimated growth rate of 13%, for a reasonable PEG of 1.59. The company even has a forward yield of 1%, and only three analysts cover the stock. Institutional ownership of this stock is only 19.80%.

Ambev has an Operating Margin of 29.25%, greater than competitors such as Formento Economico Mexicano (FMX) of 13.2%.

The company Quilmes Industrial (LQU) is a subsidiary of Ambev.


Conclusion

After reading and studying the three companies, I hope that you feel like you are in another world, far away from any United States credit problem. Central European Distribution (CEDC), Wimm-Bill-Dann (WBD), and Ambev (ABV) are three great ways to get away from it all.