Market Watch : Consumer-Stock Sidestep
Charles Albers’ Guardian Park Ave. stock mutual fund is not having a good year. But it did have a fine decade in the 1980s, and Albers’ record since he started running the fund in 1972 has landed him on Forbes magazine’s elite-fund honor roll.
So, despite Guardian’s 20% plunge this year, Albers is sticking with his stock-picking model. It tells him to avoid the consumer stocks that continue to lead the market--the food, drug and household-goods stocks that almost everyone still loves.
Albers, who manages the $200-million Guardian fund from New York, rates stocks using a model that focuses mostly on price relative to earnings per share and cash flow, along with earnings momentum. What he sees when he looks at the consumer stocks: “They’re selling for high multiples of cash flow and earnings, and yet earnings momentum seems to be losing strength.”
What’s more, he says, the trend “has become more pronounced in recent months.”
Most buyers of food and drug stocks, in particular, are focusing on their “safe” characteristics--the companies’ ability to maintain sales and earnings even if the economy goes into a deep recession. The idea, of course, is that people still have to eat, and they still have to buy medicine and maintain their health.
Maybe so. But Albers questions the high prices investors are paying for those stocks. The average stock in the Standard & Poor’s 500 index now sells for 15 times the most recent four quarters’ earnings per share. The stocks that are keeping that price-to-earnings ratio up are names such as Quaker Oats, Heinz and General Mills, all selling for about 17 times earnings. Also, there’s drug giant Merck at 18 times earnings, Procter & Gamble at 18 times, and Gillette at 21 times.
Are they worth those premiums? Albers sees chinks in the groups’ armor, suggesting that the premiums no longer are warranted. Overall, many of the factors that made the stocks such stellar performers in the ‘80s--expanding profit margins, lower tax rates and low inflation--are history now, he notes.
Just in recent weeks, cereal firms such as Quaker, Kellogg and Ralston Purina frightened Wall Street with talk of lower profit margins ahead. Kellogg CEO William LaMothe told analysts that Kellogg may have to hold down price increases in 1991 to deal with rising competition in a tough consumer environment.
Dairy giant Borden, meanwhile, saw its stock plunge after CEO R. J. Ventres announced on Oct. 30 that he sees “growing pressure on earnings from increasing competition, the economic slowdown” and other problems.
What seems to be happening is that, one by one, the market is cutting down the last of the high fliers. All it takes is one disappointing earnings report to start the chain reaction. Last week, the pollution-control group was zapped when Browning-Ferris Industries issued a dismal profit outlook.
Albers, who takes a long-term view of the market, says historical patterns alone suggest that the 1990s shouldn’t belong to the consumer stocks. His charts show that, since 1936, the consumer stocks’ performance versus the market has tended to run in 10-year cycles. From 1936 to 1945, the consumer stocks performed better than the market, he says. They then lagged from 1945 to 1955, outperformed again from 1955 to 1972, lagged from 1972 to 1980, and did spectacularly from 1980 to this year.
The groups that should be the leaders in years ahead, Albers believes, are industries such as technology, fertilizers and defense. He also sees some real bargains now among insurance stocks. Few of those areas have paid off well this year--hence Guardian’s slump. But Albers has a nice bunch of laurels to rest on: Guardian’s total return was 309% in the 10 years ended Sept. 30, versus 207% for the average stock fund. Albers can afford to wait to be right.
Will the Fed Choose Now or Later? The Treasury’s quarterly megabond sale is finished, and the bond market celebrated with a rally Friday. Interest rates dipped across the board. Now, the focus is on the Federal Reserve’s policy meeting on Tuesday. All of the betting seems to be that the Fed will cut rates quickly, to help shore up the sinking economy.
Gary Schlossberg, economist at Wells Fargo & Co. in San Francisco, sees the Fed letting short-term interest rates drop a quarter of a point by the end of this week. That could cut the discount rate on three-month Treasury bills from around 7% to around 6.75%, the lowest in more than two years.
But Robert Brusca, economist at Nikko Securities in New York, thinks that the Fed will wait until early December to ease. Inflation is a lingering problem, even beyond the recent energy price hikes, Brusca says. And he believes that the Fed wants still more painful evidence that the economy is definitely in recession.
If Brusca is right about the Fed’s timing, there will be a lot of disappointed people around Wall Street later this week. But even if the Fed moves quickly, investors probably shouldn’t panic about locking in long-term yields. You’ve got time to shop around. “I wouldn’t look for any major decline in long rates until the Middle East situation is behind us,” Schlossberg says.
LAST OF THE MOHICANS?
While the average stock is down 13% for the year, these stock industry groups still show gains--the last areas of support for the market.
Pct. change Group year-to-date Health care (misc.) +41.7% Tobacco +13.4% Soft drinks +13.0% Oil well equip./svcs. +11.0% Health care (divers.) +7.3% Household products +6.9% Cosmetics +5.3% Medical products/supplies +4.1% Defense electronics +2.6% Drugs +2.0%
Data through Nov. 8
Source: Smith Barney, using S&P; indexes
