Here's your consumer packaged goods playbook
The lack of belief in what so many describe to me as prices "way too elevated to be sustainable" keeps me intrigued in this market. The fact that so many people think that stocks are just up way too much vs. the fundamentals? I like that, too.
I keep thinking, for example, about all of these research pieces lately, the plethora of reports downgrading the consumer packaged industry stocks because they have run too much. They seem like hourly occurrences.
Each piece seems to have the same point, the same siren: this group is the most overstretched it has ever been, and you have to take profits now before ... well, who knows what!
Let's take a look at one of the classic names that research analysts have been talking to me about being overvalued: the stock of General Mills, which has gone from $56 to $64 in one year's time.
Do I think General Mills, for example, should be at $64? One way to look at this stock is the way I would have at my old hedge funds, if I owned it: yes! But because it went up without me, no! I put it that way because almost all of the reports I read about this stock and others in its cohort are all damning, with faint praise about how, of course, it's a good company, but no way can it support that valuation. The only issue: these reports were issued when the stock was in its $40s, $50s and now $60s. It's been seemingly without a champion the whole way up.
But what's really got analysts and hedge fund managers upset about this run? I think there's disregard for the stock, because General Mills is really the classic example of company that's slow, only somewhat steady, with little organic growth and no pizzazz and, therefore, a very over-stretched valuation.
The stock's principal claim to fame? Like so many of these others, like Kellogg and Campbell, it never comes in!! Buyers lurk everywhere. Underneath, to the side, and sometimes above!
Meanwhile, these companies buy back stock with alacrity, keeping the float extra tight. They raise dividends repeatedly. They offer just enough EPS growth that they keep the bears at bay.
The analysts warn us none of this can continue, and stocks like General Mills are dangerous because of their advances. But let me ask you, for all of its gains, do you regard General Mills as a dangerous stock? Is it one that's about to get crushed?
Do you think any company in its cohort is about to be obliterated? Clorox? Dr. Pepper? Kimberly? Procter? Estée Lauder?
It's almost as if there's some invisible floor there that governs them, and you need a really, really ugly day to penetrate that floor, one that rarely comes. We were down 1% yesterday; I detected not an ounce of selling pressure in the group.
It's tougher to find stock for sale in these companies than it is to get a couple of tickets to Hamilton. There's no size available.
Now, maybe that's because there are no longer brokerages willing to position these stocks for sale. So they come out in dribs and drabs. Or maybe it's because people are so desperate for these now meager dividends? Or is it that there just are no big block sellers anymore, because they are largely owned by index funds and when stock does come in for sale the company buys it?
If you aren't in, what do you do? I think at this point you do have to wait. But you are waiting for a very specific set of events. You need some bad news to break in the macro portion of the economy between 9:30 and 10 or between 3:30 and 4, when the companies can't buy stock themselves. You need the event to have nothing to do with the actual prices of products they sell.
You get all of those circumstances and you have it, the opportunity, although you can't take the first one, because what will happen is that there are now enough momentum guys in these stocks that they will flee on day one and day two
It's down day three that you buy, or nothing.
Who knows? Maybe one day we will discover that the move was all about commodity deflation. Or maybe consolidation? Or a weaker dollar.
For now, though, there's your consumer packaged goods playbook. It's worked for a year. I don't see it not working any time soon.
This article originally appeared on Real Money on APR 06, 2016.
