I must admit I am surprised how angry people can become when their widows and orphans stocks, mainly consumer staples with reliable dividends, are attacked. It is no secret that I‘ve been writing and commenting negatively about them for some time. And I was right in most cases, as these “safe bets“, which according to the fan base belong in every defensive portfolio, have performed very poorly. I stick to my view that the dividends won’t be safe over time. Once and for all, I am now unveiling why my pessimism likely is warranted.
Summary and key takeaways from today’s Weekly
– Consumer staples stocks have been in brutal bear markets for some time now.
– The discussion focuses on wrong aspects in my view, because we are dealing with structural cracks and shifts.
– Everyone knows the stats and likely also the consequences, but the majority does not seem to connect the dots.
In the past, I have published plenty of articles about consumer staples, covering both, individual stocks and big-picture Weeklies. One Weekly that immediately comes to my mind (thought with a not-so-well- chosen headline) is this one (see here). Or take a look (here, here or here).
While we haven’t seen yet a mass-butchering of dividends in the sector, respective consumer staples stocks have been in a brutal bear market. It is safe to say that many investors don‘t know why this is the case, wondering when this anomaly will end.
Most of these stocks are affected, so that we cannot blame it on rare exceptions.
Or my favorite: “Mr. Market just doesn’t understand“.
When the exception becomes the rule, it is finally time to once and for all open the eyes, ears, and switch on the brain, instead of keeping everything shut.
My readers know that I tend to fire a provocative shot occasionally.
But I seldom engage in hoping and praying. Investing in stocks is not about believing (to the biggest part at least), but about fundamentals, sniffing out catalysts and drivers, as well as being not entirely off timing wise (valuation). My last ingredient, my gut feeling, completes the recipe.
And this is where we are: It might not be wise to be overly optimistic about consumer staples, despite here or there hefty stock price drops.
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Living in the past can be costly
One of the arrows I like to fire is to remind my readers not to live in the past.
While nostalgia is a great thing in certain areas (cars, homes, precious collectibles, holidays or any other positive memories, etc.), in investing it is suicide. Sooner or later people discover this. Unfortunately, often in a painful way.
Whether one is affected directly or just through the observation of others, there is a time when certain investment topics work out. And there is a time when themes and topics break. Some are of cyclical nature, others are deeply rooted and structural.
If you understand this, you are likely already miles ahead of the majority of investors.
It reads so simple and actually is a no-brainer like brushing teeth everyday. But there‘s a difference between theory and practice. The majority acts differently than they should, often led and controlled by emotions.
Emotions are your biggest enemy in investing.
Let‘s peel the eggs now.
It is fairly simple, I do not want to artificially drum up tension.
Most consumer stocks are having a hard time, because reality is hitting hard. It has nothing to do with investors preferring hot Mag 7 or AI stocks, growth over value, or any other nonsense you are hearing and reading every day.
It is a structural break. A huge market force that for some time could have been ignored. But payday has arrived.
And I am absolutely sure you all are absolutely aware of the following.
The chart starts in 1950 with a figure of 37, meaning 37 newborns per 1,000 people – or 3.7 per 100. At that pace, each population nearly doubled. But it was short-lived. Everyone knows the trend is down.
People also know, whether consciously or not, that a figure of less than 2.1 means the population is not growing anymore (2 = stable). 17.13 sounds like a great figure, but it is per 1,000, not per 100 – it‘s 1.7 children per woman (respectively family).
1.7, means the pool of potential and future consumers is shrinking fast.
And this is for the entire world population, already including highly productive and fertile countries and regions. The majority does not seem to care. And to ignore it.
The next chart shows a detailed overview.
We can see two things.
First, for ALL regions, the trend is down, including Africa where you can occasionally hear people say every woman has ten kids or more. This is simply not true.
And second, even though the world average in this case looks to be slightly above the critical threshold of 2.0, this figure is boosted by the black line representing Africa. The rest of the world is below 2.0, i.e. in shrinking mode. The two biggest losers, little surprisingly, are Europe in red and North America in yellow where the figure in some countries is even closer to 1 than 2.
See for example a piece of news I stumbled upon yesterday (see here).
Here is the same chart, but bigger.
Breaking it down further is not really necessary, but I am posting this one here, too, as it has triggered me to write this Weekly.
Most countries are simply running below their replacement rate, effectively shrinking demand and the supply of consumers.
But why have these stocks only recently (a few years, max a decade) started to experience painful and prolonged bear markets?
For some time, the companies were able to balance this highly negative business factor through offshoring, importing cheaper goods, automation, price hikes, gimmicks like shrinkflation, quality downgrades, mergers and market consolidations, and other similar tricks. Also, economies were growing faster, countries had less debt, and people simply had more left over to spend and consume.
But it becomes harder and harder To keep the wheel spinning.
At a certain point, goods become too expensive, forcing people to trade down like in the current environment where perceived brand values turned out to evaporate – until recently absolutely unthinkable for many. Pricing power – a relict of the past. Private label brands stand ready. Mass layoffs and a weak consumer sentiment come on top, not necessarily a tailwind, exercising pressure from a different direction.
And third, something I have been criticizing all along, are the high debt piles these companies amassed, in assumption of eternal growth. Bad luck, as not only did the end of zero interest rates catch many companies on the wrong foot. But plenty of debt facing a structurally challenged business environment has created a sclerosis these retail darlings can hardly escape from.
One solution would be to massively downsize, to aggressively pay down debt, write off brand values that are based on decades-old memories and less so contemporary reality.
This would necessitate in many cases dividend cuts.
No one wants to hear this, though. Of course investors not, but managements neither. No one wants to touch thought-to-be-safe dividends. Else, these stocks will find themselves another floor lower.
In my view, this explains the underlying mechanics better than “Stupid Mr. Market doesn‘t see the value“.
You be the judge.
But I am staying out such stocks. I won‘t be eating twice as much, nor will I in any other shape and form contribute to higher consumption beyond what‘s necessary, respectively possible at all.
And the argument of emerging markets being the growth driver, pulling up the average, has its flaws, too. My guess is that these countries at some point will want to establish their own industries and companies. Not only to better represent and satisfy cultural differences. But to have better control and oversight, as well as to simply favor domestic interests, instead of buying foreign candy bars or cereals.
In short, the gimmicks ran out of gas. These stocks aren’t dying – they’ll just need to adapt to a leaner world. But we are not there yet. For investors, it’s a rotation signal: Favor companies that either don’t are aligned to these industries or target direct beneficiaries like discounters over premium brands.
At the moment, stocks like Walmart (ISIN: US9311421039, ticker: WMT) or Dollarama (ISIN: CA25675T1075, ticker: DOL) are simply too expensive for me. But these are just two examples to demonstrate in which direction I am thinking.
That‘s why I prefer other sectors to generate ideas for my members.
Conclusion
Consumer staples stocks have been in brutal bear markets for some time now.
The discussion focuses on wrong aspects in my view, because we are dealing with structural cracks and shifts.
Everyone knows the stats and likely also the consequences, but the majority does not seem to connect the dots.
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