3 Consumer Staple Stocks That Aren’t So Safe

Source: Thinkstock

Source: Thinkstock

Investors looking for safety and consistency often look towards consumer staple companies. These companies generally don’t grow rapidly, but they generate consistent returns that compound over long periods of time. Thus they are often recommended to risk-averse investors and to retirees or those who are approaching retirement. From a traders perspective, these stocks outperform when the market turns down and we see a rotation out of economically sensitive stocks into recession resistant stocks, which often include consumer staple stocks.

What investors seem to forget is that just because these investments generate stable returns doesn’t mean that the can be bought at any valuation. The fact that bond yields are so low and the lack of high yielding assets in the market place has sent investors pouring into several of these names, especially if they demonstrate even the slightest hint of growth. But while these stocks are cheaper than bonds, that hardly makes them cheap. In fact some well-known names trade at lofty valuations. This eliminates the safety factor, and you are probably better off buying some inexpensive economically sensitive stocks than you are buying these from the standpoint of a risk averse investor. Thus the stocks I list below are risky despite the fact that they have relatively consistent earnings and pay stable dividends.

1. Colgate Palmolive (NYSE:CL)

Colgate Palmolive is currently trading at an all-time high. It also trades at an incredible 30-times earnings despite the fact that earnings growth has been rather minimal over the past couple of years. Investors seem to be hunting for reasons to justify owning this stock when they simply aren’t there. For instance the lack of earnings growth is explained away by arguing that the company is growing earnings if you correct for weakness in foreign currencies. The high valuation is justified by arguing that the company has an earnings yield (i.e. the inverse of a price to earnings multiple) that exceeds Treasury Bonds.

Finally, investors like to point to the earnings number if we exclude one-time expenses. But a quick glance at the company’s income statement reveals that these one-time items occur with such regularity that ignoring them makes no sense. Ultimately Colgate is a solid company that has generated value for long-term shareholders, but that doesn’t mean that it is a good investment at $69/share and 30-times earnings on virtually no growth.