I often find myself pondering the hypocrisy and obvious logical contradictions of our world today. As a society, we are quick to condemn testing of any kind on animals, but are happy to let the likes of Facebook, Amazon, Apple, Netflix, and Google (FAANG) perform social experiments on us without consequence. Consumed by the safety of Boeing airplanes despite an amazing 60-year track record, but enamored when Elon Musk uses his customers as guinea pigs to perfect his Autopilot system sacrificing them in pursuit of the “common good.” Concerned about the environmental impact of eating meat, but eager to try insanely over-processed non-meat foods with questionable additives and lab created meat. Complaining about the greed of drug companies who must endure expensive, multi-stage processes for bringing a drug to market, but eager to “vape” anything based upon conjecture and word of mouth recommendations.
Don’t get me wrong. Being proactive about things like animal testing, airplane safety, the environment and the like are largely sincere and noble pursuits. But frankly, as Americans, our willingness to be routinely duped by hype and misdirection is troubling. Michael J. Fox’s quote from American President comes to mind: “They want leadership. They’re so thirsty for it they’ll crawl through the desert toward a mirage, and when they discover there’s no water, they’ll drink the sand.”
So what does this have to do with investing? Consumer Staples stocks – that’s what.
- P&G trading at 25x forward earnings growing at an 8% rate – or a 3.4 PEG (P/E divided by Growth Rate x 100), a 38% premium to its 10-year average.
- Clorox trading at 24x forward earnings growing at a 4% rate – or a 6.0 PEG, a 205% premium to its 10-year average.
- Coca-Cola trading at 25x forward earnings growing at a 7% rate – or a 3.7+ PEG, a 22% premium to its 10-year average.
- Kimberly-Clark trading at 20x forward earnings growing at a less than 5% rate – or a 4.2+ PEG, a 68% premium to its 10-year average.
These are great, well-run American companies, no doubt. But, in our view, investors are looking for safety in all the wrong places. If you knew that we were heading toward a recession, wouldn’t it be better to invest in a company that can grow regardless (maybe not as fast), rather than a company that can’t grow sales organically, but whose products simply are perceived to be “must haves” even though they face tremendous competition and razor thin margins? What if what is perceived as “safe” is trading (as a group) at a 23% premium to its average historical valuation? Maybe it’ll work for a little while longer – things that are expensive, can get more expensive especially when fear works its way into the equation. It comes down to this then – can you pick the inflection point when owning these companies goes from being safe to getting slaughtered? Probably not. No one can with consistency. In our opinion, many investors are “drinking the sand” when they should be searching for real sustenance.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of October 2019 and are provided for informational purposes only. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.