Relative to the rest of the stock market, consumer staples stocks are now at historically low valuations.
Usually, these high-quality stocks trade at a big premium to the rest of the market.
Today, they don’t…
That is music to my ears because these are the boring, cash-gushing businesses that I love to own.
Consumer staples are great businesses.
They provide stability for a portfolio because they generate steady growth over long periods of time.
These are the companies that consumers rely on for everyday necessities. They sell us the essentials.
As consumers, we buy these products regardless of the state of the economy or our own personal financial position.
That’s why these businesses don’t skip a beat, even during recessionary periods.
Companies in the consumer staples sector include retailers like Walmart (NYSE: WMT); grocery stores like Safeway, owned by Albertsons Companies (NYSE: ACI); household products companies like Procter & Gamble (NYSE: PG); and packaged food businesses like General Mills (NYSE: GIS).
These companies are far from exciting, but the revenues, earnings and cash flow they generate are extremely predictable – as is their long-term growth.
These companies’ predictable growth and immunity to business cycle fluctuations are why they generally trade at a premium to the overall market.
While I love to own these reliable companies, those premium valuations often make them too expensive to put into my portfolio.
Today, though, the consumer staples premium is the smallest it has been in recent memory. That makes the consumer staples sector a great place to turn for investors who are looking to add to their portfolios today.
Underperformance Sets the Stage
Since the stock market bottomed last spring, consumer staples have badly underperformed the overall market, as represented by the S&P 500.
From the start of April last year, the consumer staples sector – which is up 27% – has generated only one-third of the 72% return of the S&P 500.
But even those numbers don’t tell the entire story…
The technology sector has been the leader driving the S&P 500 over the past year.
Compared with the performance of tech stocks, the underperformance of consumer staples looks even worse…
The tech sector’s return has quadrupled that of consumer staples since the market started recovering.
You may recall that back in February, I voiced my concerns about the rally in tech stocks pushing valuations of many companies in the sector to concerning levels.
This rally in technology stocks and other sectors has pushed the overall market into rare territory.
Against the 10-year average of real (inflation-adjusted) earnings, the stock market is in the 98th percentile of historical valuations today.
That means the stock market in the United States historically has been more expensive only 2% of the time.
And that was only during the dot-com bubble in the late 1990s…
Clearly, a valuation like this does not bode well for stock market returns over the next few years.
That is especially true for the most expensive sectors of the market, like technology.
Yet against this near historically expensive market setup, consumer staples are valued completely differently. These great companies have rarely – if ever – been better bargains.