The power of boring stocks (consumer staples)

Investment Analysis Clubs Saul’s Investing Discussions
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http://www.valuewalk.com/2016/09/mastery-ignorance-part-iii/…

“…the most profitable industries historically have tended to be not the companies most closely associated with technological innovation, but rather those that are least subject to disruption. …industries such as tobacco and beer have tended have higher risk-adjusted returns than more glamorous industries…”

“…the under-the-radar nature of these consumer staple-type industries…make[s] them less prone to investor enthusiasm and resultant over-investment such as what happened in the utilities bubble of the 1920s, and the tech bubble of the 1990s…”

“We wanted to take the analysis a step further, and see just how stable the various industries have been over time, not just in terms of returns, but in terms of valuation multiples.”

“Greater volatility doesn’t always equal higher reward”

“not only do Non-Durable [consumer staples] industries have the highest risk-adjusted returns (e.g. higher Sharpe ratios), they have also posted some of the best absolute returns. Conversely, the highly volatile technology and durable goods sectors are near the bottom when it comes to absolute returns.”

So… Skechers instead of Skyworks…?

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EdGrey,

SKX is Consumer Discretionary (sub Footwear) not Consumer Staples.

Companies like MO, KMB, PG, CL and CLX are Consumer Staples.

Gene
All holdings and some stats on my profile page
http://my.fool.com/profile/gdett2/info.aspx

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I like this article and it does not surprise me at all. I have a tendency to look for boring stocks and hesitate at anything with what I call a “wow cool” factor.

EdGrey: So… Skechers instead of Skyworks…?

Neither company produces a non-durable consumer staple, but Skyworks is (to me) closer than Sketchers.

Sketchers if (to me) a fashion company, though low fashion admittedly. A household name people get excited about.

Conversely, Skyworks is a company most people don’t even know exist but which has products most people will encounter every day. I cannot quite call Skyworks a staple of life yet, but I think they are as close as any tech company can get.

I know Skyworks has fallen out of favor here but I still love the company. I’m quite happy watching SWKS plod along slowly gaining value.

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According to Warren Buffett Coca Cola (KO) is the ultimate consumer staple but no stock is perfect all the time and Coke is a good example.

KO 40: http://invest.kleinnet.com/bmw1/stats40/KO.html

Two things happened to Coca Cola in 1981, Roberto C. Goizueta became the CEO and it was the start of a fantastic bull market that ran for 20 years. Buying KO after 1997 when Goizueta died was a very bad idea, it took almost 15 years to regain it’s all time high. Also, Goizueta success was not only because he ran a successful consumer staple but a large part was due to financial engineering he did, that could never be repeated by other CEOs (buying the independent bottlers or something).

Notice also the huge range of CAGR of the consumer staples mentioned in the previous post:


**Ticker   CAGR  Chart**
 **25 Y** 
CL      12.3%  [http://invest.kleinnet.com/bmw1/stats25/CL.html](http://invest.kleinnet.com/bmw1/stats25/CL.html)
CLX     19.9%  [http://invest.kleinnet.com/bmw1/stats25/CLX.html](http://invest.kleinnet.com/bmw1/stats25/CLX.html)
KMB      9.1%  [http://invest.kleinnet.com/bmw1/stats25/KMB.html](http://invest.kleinnet.com/bmw1/stats25/KMB.html)
MO      16.6%  [http://invest.kleinnet.com/bmw1/stats25/MO.html](http://invest.kleinnet.com/bmw1/stats25/MO.html)
PG       9.3%  [http://invest.kleinnet.com/bmw1/stats25/PG.html](http://invest.kleinnet.com/bmw1/stats25/PG.html)

There is a different kind of boring consumer staple related stock that most people haven’t even heard of, like Neogen Corporation (NEOG)

Business Summary

Neogen Corporation, together with its subsidiaries, develops, manufactures, and markets various products and services for food and animal safety worldwide. It operates through two segments, Food Safety and Animal Safety. The Food Safety segment offers diagnostic test kits and complementary products to detect dangerous and/or unintended substances in human food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminant by-products, meat speciation, drug and pesticide residues, and general sanitation concerns; and AccuPoint Advanced rapid sanitation test for adenosine triphosphate, a chemical found in living cells. This segment offers its products primarily to food and feed processors, meat and poultry processors, seafood processors, fruit and vegetable producers, grain producers and processors, and dairies; laboratories; producers of pharmaceuticals, cosmetics, veterinary vaccines, and nutraceutical products; and various regulatory agencies. The Animal Safety segment provides pharmaceuticals, rodenticides, disinfectants, vaccines, veterinary instruments, topicals, diagnostic products, and genetic testing services to the animal safety market. This segment?s drug detection immunoassay test kits are used for the detection of abused and therapeutic drugs in farm animals and racing animals; detection of drug residues in meat and meat products; and human forensic toxicology drug screening applications. Its products are also used to maintain sanitary conditions and limit the potential hazards of bacteria, fungi, and viruses. In addition, this segment offers various products for researchers to detect biologically active substances. The company sells its products directly, as well as through distributors and retail chains. Neogen Corporation was founded in 1981 and is headquartered in Lansing, Michigan.

https://ca.finance.yahoo.com/q/pr?s=NEOG

NEOG 20: http://invest.kleinnet.com/bmw1/stats20/NEOG.html

Denny Schlesinger
Long NEOG

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This piece is doing the rounds that is turning the laws of financial investing upside down. It is basically saying that age old adage that greater returns come with greater risk is wrong and that we should forget tech, cyclicals, financials etc and go with predictable widely consumed long lasting franchises…

https://www.lowvolatilitystocks.com/wp-content/uploads/Low_R…

Certain investment houses are now taking this up seriously esp in the UK and Asia like Fundsmith.

Their investment produces greater return at lower volatility and targets investments at:
•High returns on operating capital employed in cash
•Growth driven from reinvestment of their cash flows at high rates of return
•Make money from a large number of everyday, small-ticket, repeat, predictable transactions

From what I can tell their selection technique is coming down to something like what Denny uses from the BMW method by looking for: fastest growth (historical share price accumulation as the proxy for high ROCE) with the least volatility (keeping within the tightest RMS) with a industrial sector inclusion/exclusion focus.

Ant

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If low-risk stocks catch on enough, then they will be subject to a bubble and become higher risk. Since it’s in the early stages now, it might be a ground-floor opportunity. Just keep an eye on intrinsic value while you’re holding.

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Rant Alert!

It is basically saying that age old adage that greater returns come with greater risk is wrong…

Do they say what risk is? They seem to be using volatility as a proxy for risk because they can’t find a way to calculate risk proper – no one can because the future is uncertain.

The risk-free rate is the cost of money. The government can guarantee that it will give you a new dollar bill for your old one but the government can’t guarantee the purchasing power of the new dollar bill. The risk-free rate, in effect, is expected inflation plus a profit for letting the government use your money. The longer the loan the higher the rate because the further out the future the greater the uncertainty. But it’s still just a collective guess.

Stocks and bonds are risky. But how risky? Anyone’s guess is the proper answer. Some people guess better than others. The only reason to use volatility as a proxy for risk is because it’s all they have!

I’ve struggled with this idea for a long time, how is volatility risky? Say you want to cross a desert. You know from experience how long it will take (give or take a few days) and how much water you will need to make it across alive. You know you can’t carry all the needed water so you depend on finding wadis with water in them. Your major risk is the weather, if it doesn’t rain you are dead. You can equate the volatility of rainfall to risk. You can also record rainfall. Add a fudge factor (standard deviation) and you can compute your risk (give or take).

How does the above translate into the stock market? If you don’t borrow money to invest and if you don’t need the money you put in the market for your ordinary expenses then volatility is a non-issue, you can out-wait bad times. In other words, if the caravan could carry enough water, rainfall would be of no consequence, it would not be a risk factor.

In effect you only have two outcomes, dead or alive. With more water you have a greater probability that it will be alive but it is still a binary outcome, dead or alive.

My point is that one should forget about risk and volatility altogether and one should concentrate on what one can properly understand and I think there are only two real issues:

  1. Past performance over a long time period, and
  2. The business model

That past performance is not a guarantee of future performance is mostly lawyer talk not to get sued. Of course there is no guarantee of what the future might bring but betting on winners is the right way to bet.

Nassim Nicholas Taleb made the point that finance is a “bad black swan prone industry” while biotech was a “good black swan prone industry” meaning that rare unexpected results would be bad in finance (bankruptcy) and good in biotech (blockbuster drug). But what if you could eliminate credit risk in finance? You can with MasterCard (MA) and VISA (V)!

This kind of thinking – the business model – is what makes consumer staples safe investments but they are not all born equal as I showed in my previous post which is why one should use past performance in addition to business model.

Going after the next big thing is hoping like hell it will rain when starting across the desert with hardly any water.

Denny Schlesinger

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If low-risk stocks catch on enough, then they will be subject to a bubble and become higher risk. Since it’s in the early stages now, it might be a ground-floor opportunity. Just keep an eye on intrinsic value while you’re holding.

This is exactly right! The question is which is the better way of finding out if a stock is in a bubble, FA or TA?

For me “intrinsic value” (business model) tells me if a stock is or not investable but it is TA that tells me the timing of the investment.

Denny Schlesinger

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NEOG --great company built by excellent management.

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NEOG --great company built by excellent management.

Neogen, like Amazon, is moving aggressively into India and China where the middle class is growing fast.

Denny Schlesinger

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Off topic but I work in the Bioanalytical industry and Neogen is one of our largest suppliers for dehydrated media. The quality of their products definitely isn’t top tier but their pricing cannot be beat. I’ve been wanting to move back to Michigan and with Noegen based in Lansing I’ve been looking at a few positions they have posted. Interesting to see such positive comments about them on here.

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“But what if you could eliminate credit risk in finance? You can with MasterCard (MA) and VISA (V)!”

That was the idea in my post about “buying stock in the casino” - buying financial sector stocks that profit from the existence of finance, rather than depending on particular events, interest rates, etc. But there’s even risk there - e.g., Moody’s, because they glossed over the problems leading to the housing bubble.

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invain, I don’t think you’re off-topic at all. The extra info on Neogen gives us a better idea of its moat. It looks weaker to me now, since competing on price with lower quality is not a position of strength.

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To have some idea of a benchmark, Vanguard’s Consumer Staples Index fund (VCSAX) has beaten the S&P 500 noticeably just about every year over the last 10 years, and has only trailed the NASDAQ 100 since mid-2013.

I’d prefer not to invest in tobacco and stodgier companies like P&G, so I’ll be looking for individual stocks.

P&G is almost 11% of the funds assets. Coke and Pepsi combined are 15%.

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It looks weaker to me now, since competing on price with lower quality is not a position of strength.

Walmart, Amazon, Ross Stores, Costco, TJX…

Just today I was looking at prices…

http://discussion.fool.com/buckle-bke-down-down-down-32424499.as…

Denny Schlesinger

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But Neogen makes specialized, professional-use products. I’d compare them more with Snap-On Tools than with Wal-Mart, to name an example off the top of my head. We’d need to look at that specific industry. If I were in bio-analysis, I’d have a minimum quality standard before price-shopping.

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“SKX is Consumer Discretionary (sub Footwear) not Consumer Staples.”

Point taken, but SKX is well in the ballpark, because shoes are essential, and they wear out.

I’d advocate widening the criteria to include companies like Neogen and Skechers in our search for non-durable goods makers. Maybe even appliances, too. How’s Whirlpool doing?

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How’s Whirlpool doing?

http://invest.kleinnet.com/bmw1/stats30/WHR.html

Denny Schlesinger

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Walmart, Amazon, Ross Stores, Costco, TJX…

Is it better to buy sellers or makers of these goods?

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Is it better to buy sellers or makers of these goods?

I know how to evaluate and buy the retailers but I don’t know how to do that with the producers of most of their goods so, for me, the question never came up before.

I like select retailers where I can identify the reason for their enduring success. All highly successful retailers have a specific business strategy suitable for their times in technology and demographics. They are offering more than the goods on their shelves.

Sears was about railroads and catalog sales
The Great Atlantic & Pacific Tea Company (A&P) was about urban sales
Shopping malls were about suburban sales
Dell was about cutting out the expensive middleman
Walmart was about cost reduction
Ross Stores is about off-price goods
The Buckle is about customer service
Amazon is about the network effect

Unlike consumer staples (some of) these concepts are less durable with changes in demographics and technology. Only time tells you if a strategy works or not. Peter Lynch tells about a deli he liked to eat at but which was a concept that could not be successfully replicated in other markets. It was one of his losers!

The early bird might get the worm – but who the hell likes worms? LOL

The above is not to exclude consumer staples, it’s that I think it’s a false comparison. My overall portfolio strategy is to look for sustainable fast growing companies whose business model I can understand. I populate a wish list with 50 to 60 stocks. From these I pick a dozen to invest in at any one time. I don’t particularly care what business they are in, that was (mostly) taken care of when it was included in the wish list. So the comparison is by growth opportunity, not by line of business, but taking care to have as much diversity as possible. Right now my portfolio has nine strategic stocks plus one crazy idea and enough cash for one additional position. The amounts invested in each vary considerably.

Auto parts (1)
Business services (1)
Drugs (1)
Finance (1)
Food and animal safety (1)
Healthcare services (1)
Oil service (1)
Retail (1)
Travel and hospitality technology (1)
Water treatment (1)

Denny Schlesinger

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