Consumer Staples Just Got Destroyed

July 31, 2014 1:28 PM

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Consumer Staples Just Got Destroyed

Consumer staples- think Proctor & Gamble and Coca-Cola- are down 3.7% so far this week, their worst performance since the Taper Tantrum of 2013. 

As the Fed’s policies have kept interest rates near zero, investors have flocked to these names for their juicy dividend yields and relatively low volatility. 

This has resulted in Staples valuations ballooning to rare levels. People are paying 30% more for every dollar of earnings than they were only three years ago. Dr. Yardeni's work shows these stocks are more expensive per share relative to their growth rate than any other sector; a PEG ratio of 2.01 is very expensive (see chart). They are also sporting the second highest forward P/E of any sector (17.6x).

It’s certainly possible that investors are rotating out of an expensive sector that has seen a few ugly earnings reports over the last few days. But maybe there’s more to the story; maybe large money is starting to place a wager that rates are finally going to rise over the next few months and quarters. Who needs the single stock risk if you can lend to the government at an equivalent yield?

Now rising rates have been a given for the last year and much to the chagrin of many people, rates have done nothing but fall all year. I’m not predicting that rates will rise, but I am trying to connect the dots and make sense of what I see in front of me.

Whatever the actual reason is, the only thing we can say with certainty is that they’re selling the staples harder than they have in over a year.

Photo by Marcy Leigh

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