In bad times, some stocks make a good investment

On The Money

April 20, 2008|By Andrew Leckey | Andrew Leckey,TRIBUNE MEDIA SERVICES

Worried about the economy? Perhaps your family should tighten its belt a bit.

Stop using so much soap, for example. Don't clean the kitchen floor quite so frequently. Reduce your dog's food intake by one-fourth.

All that probably won't happen. That's why investors during worrisome times often turn to the stocks of companies that produce household necessities.

As A.G. Lafley, chief executive of Procter & Gamble Co., said of the recent slowing economy: "People are not reducing tooth-brushing incidence. They are not going to the bathroom less often. They are not shaving meaningfully less often."

Consumer staples include household products such as laundry detergent and deodorant, as well as food, drugs, beverages and tobacco. Because of the constant and predictable demand for such products, they are considered defensive investments to reduce portfolio risk.

These stocks had a price run-up on growing economic fears last year and have slipped back a bit this year. The reason to invest now is if you believe the economy is going to worsen.

Yet, however the economy performs, such household names are frequently counted on to provide a foundation for a personal portfolio. They are becoming increasingly global in their reach.

"If there are signs of economic recovery sometime this year, you can expect this group to lag, but until then it will be front and center," said Jack Russo, senior consumer analyst with Edward Jones in St. Louis. "While there is some concern that domestic growth is slowing for these companies, they do have broad international exposure."

The prices that these firms pay for the materials used to make their products have been on the rise, but that isn't the worry that it once was.

"Pressure from commodity prices began in 2003, and around 2004 the companies were able to raise prices," said Steven Ralston, analyst with Zacks Investment Research in Chicago, noting that productivity gains also have accelerated. "The consumer is willing to accept price increases more readily now, so they have become a nonissue."

There are many ways to play consumer staples.

For example, in mutual funds, the $872 million Fidelity Select Consumer Staples fund has a 12-month return of 12 percent and three-year annualized return of 14 percent. Among its largest holdings are Procter & Gamble, CVS Caremark Corp., Colgate-Palmolive Co. and Kroger Co. This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment.

In an exchange-traded fund, the $465 million Vanguard Consumer Staples ETF has a one-year return of 5 percent and three-year annualized return of 9 percent. It also focuses on profitable, dividend-paying global companies that have name-brand products. The quality of its holdings makes it less risky than typical sector funds.

The one unavoidable company in this mix is P&G, the world's largest consumer-product manufacturer, with famous brands such as Tide, Charmin, Pantene, Cover Girl and Iams.

"Procter & Gamble is a behemoth, and that is why Warren Buffett has a position in it," said Ralston, who has a "buy" recommendation on the stock. "It uses its cash flow to not only grow internally, but to make acquisitions."

Its stock is down 3 percent this year after last year's 14 percent gain and an 11 percent gain in 2006.

Clorox Co., which acquired the Burt's Bees natural personal-care products, is a time-tested company that is turning increasingly green. Its stock is down 14 percent this year after gains of 2 percent last year and 13 percent in 2006.

yourmoney@tribune.com

Andrew Leckey is a Tribune Media Services columnist.

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