New Year's is for fresh starts, resolutions, optimism. Except, it seems, on Wall Street this year. There, Scrooge is in. With 10-year Treasuries now yielding less than two-year notes, investors seem to be preparing for a cold winter, or at least a cooler economy. For one group of stocks, that points to good times ahead. Consumer staple companies, the makers of the mundane--toothpaste, breakfast cereal, cigarettes--like chillier economic weather. That's when their stocks shine.
Smart investors like Morgan Stanley (MS) chief U.S. investment strategist Henry H. McVey, and James P. Cullen, manager of the Pioneer Cullen Fund (CVFCX), started their staples shopping last summer, inching their portfolios toward a more defensive posture. Since then the stocks have gotten pricier. Standard & Poor's Chief Investment Strategist Sam Stovall notes that as a group they trade at 17.1 times estimated 2007 earnings, vs. 14.4 times for the Standard & Poor's 500-stock index.
Good buys remain, though, particularly among multinationals with big emerging-markets exposure. "The expertise to penetrate markets--you have that or you don't," says Michael Embler, chief investment officer of Franklin Mutual Advisors (BEN), which manages the Mutual Series funds. He likes Nestl? (NSRGY), Altria Group (MO), and L'Oreal (LORLY). Rapidly growing middle classes in Russia, India, and Brazil make the argument even more compelling, he says.
Revenue growth for the group is modest compared to tech or energy, but some companies--particularly ones with little private-label competition--have found a way to grow faster. That includes candy and gum maker Wm. Wrigley Jr. Co. (WWY), as well as companies that figure out how to break into pricier categories. Procter & Gamble's (PG) Olay Definity anti-aging skin lotion, for example, sells for $24 to $30 a bottle in stores like Target (TGT) and CVS (CVS), triple what other Olay products command.
Analyst William Chappell of SunTrust Robinson Humphrey thinks this will be a good year for cost savings at p&g, too, as it integrates its 2005 acquisition of Gillette. p&g has been studying Gillette's shelf placement and retail promotions, and its tracking systems, and is now applying those to other businesses, says Chappell. On its own, p&g had organic growth of 4% to 6%, he says. With Gillette, that should reach 5% to 7%.
FOR BARGAIN HUNTERS, THE cheapest slice of the sector is tobacco. The group had a good run in 2006, thanks to the elimination of some big lawsuits against the industry, but remains cheaper than staple stocks overall. Mutual Series' Embler thinks cigarette makers overseas could be headed for more consolidation, which could warrant a look at Spain's Altadis (TABF on the Frankfurt Exchange), Britain's Imperial Tobacco (ITY) and Japan Tobacco (JAT in Frankfurt). Embler sees Altria's Philip Morris International Inc. as a possible acquirer.
On the opposite end of the spectrum, Groupe Danone's (DA) dairy and yogurt stable make it a play on a trend toward healthier eating. The stock's up from a 52-week low of 21 last January to 32.68, but its position in the fastest-growing segment in the food market--health food--gives it a chance at further gains.
By Nanette Byrnes