Is there any value to a homebuilder in a rising rate environment? Can any consumer packaged goods company buck the gravitational pull of a ten year gone run-amok?
The declines in these kinds of stocks have become positively ursine as their values cascade with the ten year's price. It's almost as if it is one-for-one, every 100 basis points rise in the ten year's interest rate is a couple of percentage point fall in the stock prices of these companies.
It's inexorable and it's almost frightening to the point that there's nothing that seems to top it. These stocks are like spewing volcanoes. You do not want to get hit by one of them.
I don't know if most people are really aware of the carnage here. In the consumer product space Procter & Gamble (PG) , Clorox (CLX) and PepsiCo (PEP) are all down about 20%. Kraft Heinz (KHC) has shed 23% of its value. General Mills (GIS) has declined 27%.
Over on the home building side KB (KBH) , Horton (DHI) and Lennar (LEN) are all of 20%.
Your strongest performers among the majors of each sector are pretty pathetic: Coca-Cola (KO) down 9% and Pulte (PHM) down 11%.
The only company that's really seen its stock unscathed is Estee Lauder (EL) with an actual 13% gain. How did it buck the trend? Simple: it isn't considered a consumer packaged goods company any more. It's now considered a prestige brand and those are typically the province of overseas fashion companies that tend to be very highly valued like Richemont (CFRHF) and LVMH (LVMUY) - a category unto itself.
Is there anything that can change the trajectories?
With the homebuilders it's very unclear. That's' because they continue to put up good numbers and the stocks continue to go down. It's not like they are missing numbers, missing forecasts, cutting growth rates or seeing spikes in raw costs in any really meaningful way. They are making every house they are selling and they are making margins that are highly unusual at this point in the cycle.
But there's the magic word: cycle. It seems that no big money manager or ETF player - and I believe they are really at work here - is willing to buck the cycle. If you do, and we actually get a short fall, you have to expect that you will lose another 10% of your value that day, if not more. There's no yield protection. There's no consolidation wave coming at least that anyone can tell. There's no savior until rates overshoot and come back down and that's going to be an awful long time in coming.
The consumer packaged goods companies have different challenges. Raw costs are going up, tastes seem to be changing, the companies can't seem to get organic growth that is appealing versus those companies that are levered to the synchronized growth story. The power has shifted to the producers, not the consumers.
Unlike the homebuilders, though, at least these stocks have some yield protection and it looks like their stocks stop falling when their yields go through 4%. At that price it looks like there are speculators who say, okay, these are overdone, if I hold on long enough either the economy will slow and rates will stop climbing and raw costs will drop or the companies will do some self-help.
Right now I sense that no matter what is said about how any of these companies is actually doing it won't matter. They are what I used to call at my old fund "down stocks." I would say that they don't know how to go up.
It's nothing new for the housing stocks. But the packaged goods? I have seen them slip. They got clobbered in 1987 when money poured out of them into the cyclicals.
However, it wasn't this bad.
This is "new" Bad.
Normally I am enticed when I see such large declines. The managements of both groups are good, the brands in the consumer business are excellent. But brand loyalty is eroding, advertising isn't working as well and millennials just don't' do what their parents did. Altogether that spells a degree of difficulty that makes them too hard to own until rates stabilize or raw costs plummet and neither seems to be in the cards right now.
