For These Funds, the Consumer Is King
Staples-heavy funds have struggled lately but could be ready to bounce back.
The stock market has rallied nicely over the past two years, but one group that has had a hard time keeping up is consumer staples stocks. The rally has largely been driven by risky assets, with financial, energy, and technology stocks rising much faster than relatively staid firms that make food, beverages, and consumer products. Making matters worse, commodity costs have recently soared, potentially squeezing the profits of food and household-product companies and/or forcing them to raise prices. The consumer goods sector has been the worst performer out of the 12 Morningstar stock sectors so far in 2011, with big names such as Procter & Gamble (PG), Coca-Cola (KO), and Nestle (NSRGY) flat or down for the year.
Despite this poor short-term run, there are good reasons to like such stocks. Companies that make food, soft drinks, and soap may not be exciting, but they tend to be profitable and predictable, reliably generating positive free cash flows. If you're worried about a market correction after the recent runup, such stocks may be among the best places to be. Many of the biggest staples firms have wide economic moats (strong competitive advantages), and after two years of underperformance, wide-moat stocks look reasonably priced right now by a lot of measures, as my colleague Ryan Leggio recently noted.
Not surprisingly, mutual funds that own a lot of staples stocks have had a tough time lately. The consumer staples fund category, which includes such funds as Vanguard Consumer Staples Index (VCSAX) and Fidelity Select Consumer Staples (FDFAX), has the worst returns out of Morningstar's 21 domestic-stock fund categories so far in 2011 and over the past three months. Yet there are some smart fund managers with great track records who are big fans of staples right now, for the reasons noted above.
David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.