But there’s another issue with consumer staples: These stocks are not cheap. With price-to-earnings ratios at 20x and higher and virtually little to no organic growth, these stocks are more like value stocks at the end of a cyclical bull market, toppy charts with slowing earnings growth.
So maybe the recession-proof thought process needs a reboot, and investors should be rotating out of consumer staples and loading up on cyclical-type stock sectors mentioned above? Not so fast. I realize I’m threading a needle by offering up reasons to go long and avoid consumer staples, but please allow me to finish.
Not even a tech stock like Cisco Systems could avoid the ire of investors when it recently reported earnings growth that was good. Cisco beat on both the top and bottom lines. But in this market, anything short of a big beat from a tech company just won’t cut it. The FANG stocks — Facebook, Amazon, Netflix and Google (now Alphabet) — which now also go by the FAANG acronym if you want to add in Apple, are literally holding up the major stock averages. That’s the big thing that has changed in the stock market.
Growth stocks need to show FANG-like growth; otherwise, they are deemed too expensive. When other tech companies are crushing expectations by double digits, Cisco’s beat was totally underwhelming: with 6.75 percent growth in net income and 4.4 percent revenue growth quarter-over-quarter. And more importantly, at over 20 times earnings, it is not a cheap stock.
Pepsi recently reported a 4 percent rise in earnings, which is considered very healthy for a corporate giant of its type. Four of the mightiest consumer staples companies — P&G, Kimberly-Clark, PepsiCo and Kraft Heinz — can’t catch a break, because FAANG has given us a new meaning of growth stock. Nine years into a bull market, only the highest-growth-rate companies can justify ever higher stock prices. In other words, FAANG spoiled us investors by defying the law of large numbers and delivering growth consistently beyond our already lofty expectations.