During the opening stages of the coronavirus pandemic, there were few better stocks to be holding than consumer staples.
Indeed, as there were empty shelves of toilet paper, stores selling out of sanitizer, and cleared out isles of cleaning products began to populate the internet, stocks like Procter & Gamble (PG) , Kimberly-Clark (KMB) , Unilever (UL) , Johnson & Johnson (JNJ) , and Clorox (CLX) all soared. Similarly, as worries over new variants rippled through to consumers, many of these same stocks saw yet another boost.
However, even as earnings results continue to prove positive, there is a lingering apprehension that the moment has passed for many of these pandemic-driven stock picks.
"Although we believe [Clorox] should ultimately be a long-term beneficiary of consumer habits developed during the pandemic," said JP Morgan analyst Andrea Teixeira in a recent note downgrading the stock. "We think the 2022 outlook highlights that consumer demand has normalized quicker than initially expected."
As an illustration of the impact, Clorox's stock rose about 50% in just the first few months of the pandemic, a stunning rate for a traditionally slow and steady dividend stock. However, from these highs the stock has slumped over 20% to its present state.
Moving beyond Clorox, Teixeira's criticism is salient for many of its peers, as a return to normalcy means a return to normal consumer habits that likely include a great deal less spent on toilet paper, cleaning wipes, and hand sanitizer. The question is one of whether investor tastes should change alongside them.
Cleaning Up Your Portfolio
In line with Teixeira's note on overly optimistic outlooks for consumer staples stocks after the pandemic-driven pop, many investors are advising avoidance of the sector at this point.
"We recommend minimizing exposure to the Consumer Staples companies that benefited from "panic buying" trends created by the COVID-19 pandemic," Brad Gregory, Portfolio Manager and Research Analyst at Buckingham Advisors, told Real Money. "Although panic buying could result in another near-term jump in sales, it would be more reflective of sales being pulled forward rather than a change in underlying demand."
He added that the impacts of inflation that are now rippling through numerous industries are likely to hinder growth in coming quarters. In line with inflationary trends, higher input costs, wages, and transportation costs are likely to put pressure on already modest margins and impact upcoming earnings results.
In that sense, investors approaching the sector now are doomed to be disappointed. At the very least, the entry point at the present moment appears less than ideal.
A Clean Cushion
That said, for those now holding the aforementioned stocks or those taking a more long-term view of the consumer staples sector, there is reason to remain optimistic.
In terms of valuations, the sector is not exorbitantly priced at the moment. As high profile, trend-driven stocks like Chewy (CHWY) , Roku (ROKU) , and Tesla (TSLA) tout price to earnings ratios in the triple digits, if not quadruple, consumer staple stocks provide a good margin of safety. In fact, many of the stocks within the sector are trading at multiples essentially in line with the overall S&P PE ratio.
It is also worth noting that in terms of this safety, many of these stocks provide a strong and stable income stream via their time-tested dividends. For example, Clorox, Johnson & Johnson, and Procter & Gamble all carry dividend yields north of 2%, while both Unilever and Kimberly Clark hover closer toward a 4% yield. Importantly, each of the dividends appear eminently safe, with raises in the yield dating back decades and now buttressed by strong balance sheets.
"I don't believe that long-term investors will be disappointed by buying and holding firms like Procter & Gamble, Clorox, Johnson & Johnson and many other firms that have stood the test of time and have been able to consistently increase earnings and dividends," Robert Johnson, Professor of Finance at Creighton University said. "It is always a good time to buy firms with strong balance sheets, earnings power, and a history of increasing dividends."
As such, if one is not timing their entry too carefully and is more comfortable with steady income rather than rapid growth, the sector could still be quite attractive. It is just important not to expect share prices to approach their pandemic-driven heights anytime in the immediate future.