Consumer Staples Stocks Look Played Out. Where to Invest Now.
If 2022’s stock market could be described as brutal, 2023’s might best be described as befuddling. Thankfully, there is a portfolio for that.
What’s so befuddling? It’s not just that there is uncertainty around inflation, growth, profits, margins, and even Covid, which continues to linger around the globe. It’s also that there’s no uncertainty about how experts view the market. All the talking heads believe the first half of 2023 will be bumpy, with things looking better by year end. “It’s a real uber-consensus,” says Lori Calvasina, head of U.S. equity strategy at RBC, who counts herself among the talking heads.
Everyone thinking the same thing is scary, and not simply because the consensus is bound to be wrong. It also means that investors end up positioned the same way in the same sectors and stocks, and that’s a recipe for volatility and disappointment as conditions change.
The solution to all this is to go where others aren’t. That means preferring utilities to consumer staples when looking to play defense. The S&P Composite 1500 Staples Index is trading at about 21 times estimated 2023 earnings, according to FactSet. That’s roughly a 10% premium to its own history and a 30% premium to the S&P 500 SPX +0.40% multiple. There is a long way to fall if investors sour on staples stocks. “I don’t want to own staples because of peak positioning and peak valuations,” adds Calvasina. “I want to be out of the staples when the market turns because they’re going to get crushed.”
Utility stocks look much better. They trade for about 19 times estimated 2023 earnings—a premium to the market and about a 12% premium to their history, similar to staples, but less than a 20% premium to the S&P. What’s more, the growth outlook for utilities is a little better than it has been in the past because they are adding more renewable power generation to their portfolios and are able to earn a regulated rate of return on the new investment, providing a boost to growth.
“Guess what I want to own in a sluggish economic backdrop?” asks Calvasina. “Anything with secular growth.”
That includes industrial stocks, which could get a boost thanks in part to all the new spending generated by the Inflation Reduction Act, the Chips Act, and the Infrastructure Investment and Jobs Act.
Even energy firms have a place in the portfolio, thanks to more-disciplined management teams, dividends, and buybacks, and because many investors seem to want to avoid them after a fantastic 2022. Funds have been flowing out of energy ETFs for the past few weeks. What’s more, “they probably won’t blow you up,” adds Calvasina.
And that’s an attractive feature in a market this confusing.