What's essential? What's discretionary? What's going to be consumed no matter how confused or weak or perilous, and what gets postponed or put off when times get tough?
We found out the answer today and it is surprising to the point that it directly impacted the entire session's trading. Today, Coca-Cola (KO) , arguably the most powerful consumer products company of all time, purveyor of something drunk through thick and thin, saw its stock rocked when its CEO guided to a very downbeat forecast, much worse than expected, citing macroeconomic forces. It was a poignant coda to the December retail sales figures that came out this morning, an extremely disappointing report, the worst in nine years.
Cisco (CSCO) , the company that pioneered networking equipment and has now developed into an indispensable software and hardware powerhouse, raised its forecast, boosted its dividend and announced a big expansion of its gigantic buyback.
What does this say?
I think it says that digital technology has become essential no matter how tortured the times. Companies can fail if they don't stay current with the best network possible.
On the other hand, sugared water, the kind that Coca-Cola brings to the consumer world, can be done without when times get tough.
I know that seems bizarre. We have always thought that the stock of Coca-Cola is the ultimate safety vehicle with a solid yield and fabulous balance sheet come thick or thin, and that Cisco's multi-million dollar networking equipment gets put off when times are tough so it's stock is much more dicey. Therefore, you shouldn't be tempted to buy Cisco's stock during uncertain times when the Fed's tightening, there's a government shutdown and a trade war, even with a near 3% yield, very similar to that of Coca-Cola's 3.39 dividend return.
The market has historically paid up for that Coca-Cola safety which, after today, I now feel is illusory. The stock of Cisco has sold at a big discount to that of Coca-Cola because it sells multi-million dollar equipment that could be cut out if companies are concerned about changing times.
I wouldn't have believed it if I hadn't heard it on the two companies' conference calls.
What was the exact explanation why Coca-Cola CEO James Quincey cut the firm's forecast? "I think we are being cautious about the macroeconomics and how that's going to be a little softer than 2018. He says he is worried about currency, about interest rates and about taxes? Soft drinks? Hmm. North America was a little softer, a little more sensitive to price increases put through to absorb input costs because of a "little bit of consumer outlook malaise." I didn't know that dropping a fiver on a 12-pack of Coke Zero, my wife's favorite, might be too prohibitive in a gloomy moment. I always figure it's about a Coke and a smile.
How about multi-million dollar equipment, the biggest of tickets short of aircraft, shouldn't that be shelved? But what did Cisco CEO Chuck Robbins tell us about his sales? "It certainly is one of the more complex macro, geopolitical environments that I think we've seen in quite a while with all the different moving parts but, to be honest, from the first day of the quarter to the last day of the quarter we saw zero difference." Robbins went on to day: "We saw very steady demand throughout the quarter and just saw great execution by our teams."
As I pondered this amazing switch in the way we value companies and therefore their stocks, I have reached several conclusions that can help us make money in a moment that both CEOs admit is difficult for most to navigate.
First, the consumer packaged goods companies in some cases may have raised their prices too high and a savvy consumer has learned to live without them. Perhaps the younger consumers, the millennials, the gen-xs and z's just don't consume product the way my generation did. Maybe they would rather carry Nalgene bottles and drink tap water. Maybe they just don't think it is worth it, especially when there's no redeeming nutritional value.
The same thing can be said for so many thousands of items in the super market that have lost their staying power, taking with them the safety of their stocks. Consider Conagra (CAG) , the maker of Slim Jims, Hunt's tomato paste, Duncan Hines and Hungry Man. Its stock has plummeted from $39 to $23 in less than a year's time. Its condiments can be done without. Kellogg (K) flubbed the quarter. Four bucks for a box of Corn Flakes doesn't cut it anymore with these consumers. The stock of Campbell's Soup (CPB) is a disaster. Last year tomorrow it was selling at $48 now it is $34. Canned, salted, preserved soup doesn't' resonate with this new shopper. You can buy the stock of Kraft Heinz (KHC) if you think that processed ketchup and cheese will be eaten no matter what. But where has that, and the dividend which now yields 5%, leave you? How about to the poor house as the company's stock has fallen from $72 a year ago to $47 now.
These stocks are about safety, yeah, safety last.
Now let's consider what Cisco really does. It enables the network of a company to connect with its employees of all kinds worldwide in a secure way while onboarding to all sorts of clouds, both private and public. A company that isn't digitized correctly is a company that's dead in the water and Cisco's customers know that. That's why it can boost its dividend and raise its forecast. That's why it has pricing power to charge more for its machines because it can't be lived without.
We see this newfound essential tech merchandise pretty much everywhere these days. Companies that want to sell something to customers can't do it as effectively without Salesforce (CRM) software. You want to run a complex bank? What happens if someone hacks into your most sensitive inner sanctum, where the keys to the kingdom exist. You need to pay up for protection, the protection that Cyberark Software (CYBR) gives you, hence why its stock soared $17 to an all-time high on stellar earnings. You want to streamline your human resources or financial teams? You need Workday (WDAY) . It's becoming indispensable, like Service Now (NOW) for information technology management. Try designing a true interactive web commerce system without Adobe (ADBE) . It's very hard to do.
Now the implications of these changes are very difficult to fathom because it's pretty clear that we are paying too much for consumer product stocks if they are truly economically sensitive. You may have to avoid the vast majority which haven't kept up with the times.
But companies with complex hardware and software solutions that empower the modern day corporation? If the company has pricing power and the smartest people globally writing the best code? We need to pay a premium for them. They are scarce and they are vital.
There will always be the outliers. I think Clorox (CLX) and Procter & Gamble (PG) , which reports tomorrow, have been able to put through price increases and I think that PepsiCo (PEP) tomorrow could show less pricing sensitivity. But do not forget the message of today: old-time safety can be illusory. New-time safety is indispensable both for the corporation and perhaps for your portfolio.