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Consumer Staples Sector

Wednesday, April 9th, 2014

The Consumer Staples sector ranks first out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 10 ETFs and 9 mutual funds in the Consumer Staples sector as of April 3, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector are here.

Figures 1 and 2 rank all nine ETFs and all 7 mutual funds in the sector that meet our liquidity standards. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 118), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.

To identify the best and avoid the worst ETFs and mutual funds within the Consumer Staples sector, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.

Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Get my ratings on all ETFs and mutual funds in this sector on my mutual fund and ETF screener.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

Screen shot 2014-04-09 at 8.41.31 AM* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Fidelity MSCI Consumer Staples Index ETF (FSTA) is excluded from Figure 1 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.

Figure 2: Mutual Funds with the Best & Worst Ratings 

Screen shot 2014-04-09 at 8.40.54 AM* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

ICON Funds: ICON Consumer Staples Fund (ICLEX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.

Vanguard Consumer Staples ETF (VDC) is my top-rated Consumer Staples ETF and Vanguard World Funds: Consumer Staples Index Fund (VCSAX) is my top-rated Consumer Staples mutual fund. Both earn my Attractive rating.

PowerShares S&P SmallCap Consumer Staples Portfolio (PSCC) is my worst-rated Consumer Staples Fidelity Select Portfolios: Construction and Housing Portfolio (FSHOX) is my worst-rated Consumer Staples mutual fund. Both earn my Dangerous rating.

Figure 3 shows that 37 out of the 214 stocks (over 36% of the market value) in Consumer Staples ETFs and mutual funds get an Attractive-or-better rating. However, only 3 out of 10 Consumer Staples ETFs (less than 77% of total net assets) and 1 out of 9 Consumer Staples mutual funds (less than 25% of total net assets) get an Attractive-or-better rating.

The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and Consumer Staples ETFs hold poor quality stocks.

Figure 3: Consumer Staples Sector Landscape For ETFs, Mutual Funds & Stocks

Screen shot 2014-04-09 at 8.39.59 AMSources: New Constructs, LLC and company filings

As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.

Investors need to tread carefully when considering Consumer Staples ETFs and mutual funds, as only 2 ETFs and 1 Consumer Staples mutual funds in the Consumer Staples sector allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Investors should stick to these funds for exposure to this sector.

Colgate-Palmolive (CL) is one of my favorite stocks held by VDC and earns my Attractive rating. Over the past decade, CL has consistently grown after-tax profit (NOPAT) by 7% compounded annually. The company currently earns a top quintile return on invested capital (ROIC) of 23% and has generated positive economic earnings in every year of our model. Because of this steady and consistent growth, CL is not the cheapest stock in the market. However, for a long-term investor, CL presents great opportunity. At its current valuation of ~$64/share CL has a market-implied growth appreciation period (GAP) of only 7 years. The Consumer Staples sector average is 39 years. If we give CL credit for 17 years of NOPAT growth at a modest rate of 6%, the stock is worth over $84/share today.

Dunkin Brand Group (DNKN) is one of my least favorite stocks held by Consumer Staples ETFs and mutual funds and earns my Very Dangerous rating. As I stated in March 2014, there are some serious issues with DNKN’s growth strategy. While the company appears to be growing NOPAT at a very fast pace, the removal of unusual, non-recurring items reveals that they only grew NOPAT by 7% in 2013, much lower than the 30% from 2012. DNKN currently earns a ROIC of only 6%, lower than its weighted average cost of capital (WACC), making the company’s plans of expansion extremely unlikely to be profitable. The valuation of DNKN is also a major concern. To justify its valuation of ~$50/share DNKN would need to grow NOPAT by 15% for 12 years. DNKN’s competitors like Starbucks (SBUX) and McDonald’s (MCD) have superior scale and returns on invested capital and will make it very difficult for Dunkin to encroach on their territory. The market’s expectation for DNKN’s growth is overly optimistic.

122 stocks of the 3000+ I cover are classified as Consumer Staples stocks.

Figures 4 and 5 show the rating landscape of all Consumer Staples ETFs and mutual funds.

My Sector Rankings for ETFs and Mutual Funds report ranks all sectors and highlights those that offer the best investments.

Figure 4: Separating the Best ETFs From the Worst ETFs

CSF4Sources: New Constructs, LLC and company filings

Figure 5: Separating the Best Mutual Funds From the Worst Mutual Funds

CSF5Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with reports on all 10 ETFs and 9 mutual funds in the Consumer Staples sector.

Kyle Guske II contributed to this report.

Disclosure: David Trainer is short DNKN. David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

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One Comment

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

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