Don’t Dump Your Staples Yet By Lawrence C. Strauss March 10, 2018 PHOTO:BLOOMBERG NEWS Rising rates don’t always bode well for stocks, particularly consumer staples. In theory, these companies—Costco Wholesale(ticker: COST), PepsiCo (PEP), andProcter & Gamble(PG), among many others—are more attractive in tougher economic times with their more defensive and durable growth profiles. Another key attribute: They can offer nice income. The consumer-staples companies in the S&P 500 were yielding 2.9% recently, well above the broader benchmark’s average of 1.9%. When the market has a bigger appetite for risk, however, these stocks can get passed over for companies with faster growth, such as technology and financial names. From early September, when the 10-year Treasury’s yield began to move up, until late last week, the consumer-staples stocks in the S&P 500 had a return of minus 1%, compared with a 12.2% result for the S&P 500. Late last week, the 10-year Treasury was yielding 2.86%, up from just over 2% in early September. But the relationship between interest rates and stock prices isn’t necessarily problematic. “Stocks can be higher 12 months into a rising-rate environment because it’s all about the economy improving,” says Brian Belski, chief investment strategist at BMO Capital Markets. Belski argued in a recent note that “some of the best periods for stocks have come when interest rates have risen from low levels.” He points out that “periods of higher or rising rates have coincided with double-digit annual returns for the S&P 500, on average.” Case in point: From January 1996 through April 1997, Belski says, 10-year Treasury yields climbed 1.24 percentage points. The S&P 500’s annualized return was 20.3% over that period. He points to five other stretches when that’s occurred since the mid-’90s, most recently from mid-2012 through late 2013, when yields climbed 1.37 percentage points, versus a 23% annual return for the S&P 500. Belski argues that rising rates aren’t the biggest worry for consumer-staples companies, which he says face a number of fundamental issues. “There is too much capacity in consumer-staples land,” he says, and for many retailers, there’s the threat fromAmazon.com(AMZN). But it’s important not to lose sight of the defensive protection these stocks can provide. “I’m a big believer in reversion to the mean and in seasonality, especially when it comes to the midterm elections,” says Sam Stovall, chief investment strategist at CFRA Research. He notes that the second and third quarters of a year when midterm elections are held can be challenging for stocks. “It’s the defensive sectors, in particular health care and staples, that do the best from May to October,” he says, citing “the uncertainty associated with the midterm elections.” Consumer-staples companies in the S&P 500 are expected to grow their earnings 11.5% this year, compared with 18.5% for all of the companies in the index. The staples companies trade at a slight premium to the S&P 500—18.1 times this year’s profit estimates, versus 17.4 times for the index, according to FactSet. Still, Stovall argues, investors aren’t overpaying for “this insurance policy.” Investors, however, need to be selective in picking these stocks given the fundamental risks lurking in the sector. Belski maintains that companies likeConstellation Brands(STZ) are better positioned than many consumer staples, in particular retailers with a broad focus. Constellation, he says, has a more specialized focus, doesn’t have to worry about having too many stores, and doesn’t face the same threats from online sellers as some retailers do. (Click herefor more on consumer-staples stocks.) Constellation’s brands include Corona Extra beer, Meiomi Coastal California Wines, and Svedka Imported Vodka. The shares recently fetched about 24 times the $9.58 a share that analysts expect the company to earn in its fiscal year that ends next February, up an estimated 12% from its most recent fiscal year. The Trader:“Stocks Boom Nine Years After Crisis Low” Email:editors@barrons.com https://www.barrons.com/articles/dont-dump-your-staples-yet-1520647118