Shifts May Flatten Fizz in Consumer Staples

CNBC

As markets were whipsawed last week, stocks of food, beverage and household-product companies continued to outperform, helped by better-than-expected earnings.

Shares of Kimberly-Clark (KMB), Hershey (HSY), JM Smucker (SJM), Procter & Gamble (PG), General Mills (GIS) and Colgate-Palmolive (CL) were among those touching fresh all-time highs last week.

But with investors abandoning the safety and income of bonds for consumer staples' stocks with chunky dividends and stable earnings growth, some strategists say it's almost time to look toward more economically sensitive names as gains become more limited.

Investors with a five-year horizon may not find it much of a gamble to begin shifting into growth stocks, said David Kelly, chief global strategist at JPMorgan Funds.

"Over the next few years, the growth stocks will probably outperform the more defensive names," he said. "A lot of money is going into defensive names as a substitute for bonds. As interest rates go up and confidence returns, money will move from that part of the market toward more aggressive names."

Given ongoing economic uncertainty in the global economy, others suggest waiting.

"We've been advocating stocks with bond-like characteristics," Barry Knapp, Barclays' head of U.S. equity portfolio strategy, told CNBC. "We're not ready to make that change."

But he wouldn't put new investment into defensive sectors, he added.

"We would not be selling the defensive names, but I'm not sure I'd put a heck of a lot more money into them, either," Knapp told CNBC.

Expectations for better earnings growth has been one reason consumer staples are up 16 percent this year, making the S&P 500 (^GSPC)'s 9 percent gain look rather ordinary in comparison. Some stocks, such as General Mills, have done even better-up more than 20 percent so far this year.

"We have a market expectation for just 2 percent EPS growth this year," said Gina Martin Adams of Wells Fargo. "Staples probably will produce 5 percent EPS growth."

Both Coca-Cola (KO) and PepsiCo (PEP) have reported better-than-anticipated results. That growth came despite a stronger dollar denting overseas profits and faltering emerging markets growth. A stronger dollar reduces the value of revenues booked overseas.

Although there was concern Coke's volume and revenue could disappoint considering potential weakness in Brazil and the U.S., the company beat expectations. And even a recession in Europe didn't derail business there.

(Read More: Coca-Cola Beats Estimates, Boosted by Emerging Market Sales )

"Volumes were flat" in Europe, JPMorgan analyst John Faucher told CNBC. "They've just got so many economic headwinds, flat is not that bad."

Fresh off a "transition year," Pepsi also beat analyst forecasts. CFO Hugh Johnston told CNBC that price increases helped boost profit margins during the quarter, while an expanded snack portfolio is doing very well in China.

(Read More: Pepsi Tops Earnings Estimates, Stands by 2013 Outlook )

Faucher has a "neutral" rating on Coke shares.

A 10-year holder of Coke stock, Jason Subotky, a portfolio manager at Yacktman Asset Management, told CNBC that he still sees opportunity.

"All we want is modest 3, 4, 5 percent volume growth," he said. "And it starts from the fact that they're the dominant player in the industry but they only represent 3 percent of beverage consumption for an individual. A 3 percent market share for a dominant company-there's a lot of beverages still to sell to people."

Staples companies are continuing to benefit from overseas growth-particularly in emerging markets. General Mills CEO Ken Powell told CNBC recently that the food firm is benefiting from the "astonishing" development of the middle class in emerging markets.

"People get rising incomes, they move into that middle class-the first thing you do with that little extra money is you improve your diet," he said. "So it's a tremendous opportunity for companies like General Mills to get incremental growth."

(Read More: Global Growth Creates Jobs at Home: General Mills CEO )

Helped by cost-cutting and strong growth in its international markets, tissue and diaper maker Kimberly-Clark posted a bigger-than-expected jump in first-quarter earnings and raised its forecast for the year.

But, Morningstar analyst Erin Lash wrote in a note: "Overall, the shares strike us as rich, trading at nearly 19 times the midpoint of management's revised guidance, in light of the fact that Kimberly's product categories are extremely susceptible to consumer trade-down, and commodity costs are likely to rear their head again before long."

Procter & Gamble, Colgate-Palmolive and Hershey are among the staples companies reporting earnings this week. Can they keep the run going?

-By CNBC's Justin Menza ; Follow him on Twitter @JustinMenza

Additional News: Johnson & Johnson Tops Estimates on Growth of Newer Medicine

Additional Views: There's 'Persistent Demand' for Stocks: BlackRock CEO

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Disclosures:

Coca-Cola was a JPMorgan client within the past 12 months.

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