Britannia Radio

Why This Safe-Haven Sector is No Longer Safe By Frank Curzio, editor, Penny Stock Specialist Friday, April 29, 2011 After months of rising commodity prices, the "big name" consumer staples rally is ready to fizzle… Consumer staples have long been considered a "safe haven" sector… an area investors can flock to when they get worried about the economy or the general health of the stock market. "Staples" are products that consumers can't live without. Proctor & Gamble, Colgate-Palmolive, Kimberly Clark, and Coca-Cola are considered staple stocks. They make diapers, detergent, toothpaste, tissue paper, and soda. These companies are usually slow growers… But they have steady cash flows and pay dividends of about 3%. More important, these companies typically have "pricing power." That means they have an easier time passing off higher raw-material costs to consumers during inflationary times. Staples tend to outperform the S&P 500 during bear markets. With deficits surging and stocks getting expensive after a huge two-year rally, investors have been moving into these stocks and pushing the price of many of them higher. I suggest thinking twice before piling in right now. You see, commodity costs have soared over the past 45 days. The prices of wheat, corn, and oats are up more than 20%. Gasoline prices are up more than 10%. Oil prices have climbed past $110 per barrel. Under normal circumstance – or mild inflation – companies like Proctor & Gamble and Kimberly-Clark can simply raise prices to offset higher raw-material costs. But these are not normal times. Commodity prices are moving up so fast, margins for most companies in this sector are beginning to contract. For example… last week, Kimberly-Clark said, "The rapid run-up in commodity costs has influenced our near-term profitability and a number of our businesses will be raising selling prices." The company reported a 9% decrease in first-quarter sales. Also, management said its costs for key raw materials would be roughly $500 million in 2011 – more than double the original estimates. On Monday, Proctor & Gamble said it's raising prices on Pampers diapers by 7%. It will also increase prices on its Charmin and Bounty paper brands by 5%. Coca-Cola is raising prices on its beverages by up to 15%. In January, Colgate-Palmolive said it would raise prices by 2% to account for higher commodity costs. There is no way Colgate can meet earnings estimates by raising its prices by 2% – when raw material costs are up 20% in less than two months. These companies must raise prices by a huge amount to maintain margins. My question is … How much can these companies raise costs before consumers switch to cheaper brands? Are consumers going to pay more than $40 for Pampers when BJ's Wholesale is selling its brand of diapers for $25? Will consumers pay $5 for a box of Frosted Flakes… or buy the generic cereal for almost half the price? My point is consumer staples don't have pricing power right now. In other words, consumers are not paying up for brand name products. Wages and job openings are still weak. People don't have enough money to splurge on brands like they did in 2007. This is why discount stores like Dollar Tree, 99 Cents Only Stores, and Dollar General are at 52- week highs. Business is booming for the companies that sell cheaper brands. I'd be careful buying consumer staples as a safe-haven investment. Sure, their dividends are attractive in a zero-interest rate environment. But these yields are meaningless if these stocks decline 10%-20%. If you're focused on safety right now, I recommend simply heading for the sidelines and waiting in cash. Good investing, Frank Curzio Further Reading: There are two types of companies in the commodity sector – producers and processors. When commodity prices soar, some companies benefit and some get hit hard. And according to Larsen, "Investors who don't recognize the difference between the two are going to get burned…" Get the details here: The Hidden Dangers of Rising Commodity Prices. Thursday, April 28, 2011 "Permabear" analyst Rosenberg gives up… turns bullish on stocks Says stocks have achieved a "Holy Grail" and the rally should continue… Thursday, April 28, 2011 What Barrick Gold's huge copper purchase means for commodities and inflation "Watch where the big companies make their direct investments… That is where the markets will follow." Thursday, April 28, 2011 Frightening statistics that should make you think twice about going to college "A college degree is not an automatic ticket to the middle class any longer…"