In this note, we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one. As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).
Consumer Staples stocks are off to a tough start in 2014. Based on Friday’s close, the sector is down -3.7% year-to-date vs the S&P500 at -3.1%. From a quant setup the sector is broken across the immediate term TRADE and intermediate TERM trend durations, our language for a bearish medium term sector outlook. You’ll see a similar bearish setup for most of the largest names in Consumer Staples (see charts below).
We generally believe that the group is way over-owned and loaded with premium valuations. Headwinds we see for the group include:
- U.S. consumption growth is slowing, and dragging global growth lower
- The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 (a Hedgeye Q1 2014 Macro Theme) eroding real growth
- Less sector Yield Chasing as Fed continues its tapering program
- In the U.S.,the most recent data on Disposable Income per capita is making new lows, and
- The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months and was flat week to week
Top 5 Week-over-Week Divergent Performances:
Negative Divergence: HLF -16.2%; TUP -10.5%; NUS -9.3%; AVP -7.5%; BNNY -7.4%
Positive Divergence: SAFM +2.0%; THS +1.8%; KMB +1.3%; RAI +0.8%; DPS +0.3%
Reported Companies Last Week:
- KMG – reported 5% (high-end of targeted range) organic sales growth and 11% EPS growth in 4Q13. The sequential incremental growth QtoQ was driven from international growth (KCI is 39% of total sales). The company continues to make good progress on spinning out its health care business. Management 2014 guidance was consistent with long-term objectives and slightly better that street expectations. The strength in the KMB story is consistent with our quant factors.
- PG – The PG quarter was in-line and un-inspiring consistent with the bearish quant set-up.
The “Newsy” News Flow:
HLF and NUS: the underperformance of HLF was driven by a letter penned last Thursday from Massachusetts Senator Ed Markey (D) to the FTC, SEC, and HLF requesting more information about the company’s business practices and suggesting the company is running a pyramid scheme. Of note is that Markey has also been active and public against the marketing of Energy Drinks to youth (including MNST) and was a leading voice in the investigation into the BP oil spill.
Two weeks ago Bill Ackman of Pershing Square (and author of a 343 page PowerPoint issued in DEC 2012 on why Herbalife is a pyramid scheme) announced that he intends to issue a new report next month on how HLF operates illegally in China. This came on the heels of Chinese regulators announcing they’d investigate Nu Skin on charges it was running a pyramid scheme in the country.
The drastic stock movement on newsy events that we saw last week is nothing new to these two stocks. In short, we wouldn’t be surprised to see Ackman roll out the kitchen sink and utilize his rolodex to see his Big Short idea get going in the right direction (his price target is zero), however we cannot underscore enough how committed a community of activists (Icahn and Loeb to name a couple) are to bury Ackman on the long side and how unwilling a Federal agency (SEC, FDA, FTC, or IRS) currently is to open Pandora’s box on the multi-level-marketing business and decide whether HLF (or NUS for that matter) is a pyramid scheme.
We will opportunistically take advantage of these price swings on fear, however do not claim to know definitively if HLF is or is not a pyramid scheme. (For more following last Thursday’s announcements see our note).
Earnings Calls This Week (all times EST):
Wednesday (1/29): TUP 8:30am; ENR 10am; SPB 10am
Thursday (1/30): HSY 8:30am; MO 9am; HSH 10:30am; CL 11am; LVMH 12pm
Friday (1/31): TSN 9am; MJN 9:30am; DEO 3pm
Food, Beverage, Tobacco, and Alcohol
DEO – testing a TREND line breakdown (that would be new); TREND = $128.21
BUD – broke its TREND line and volume ripped on that last week; TREND resistance = $102.36
KO – broke its TREND line last week; that’s now resistance at 39.83
PEP – looks just like KO; recently broken TREND line of 82.59
MDLZ – broke its TRADE line on big volume last week; TREND support of $33.53 now tested
GIS – still one of the ugliest on the list; bearish TREND resistance = 49.36
KMB – best looking long on the list; bullish TREND support = 103.64
PG – ugly with bearish TREND confirmed at 80.65
MO – still holding its bullish TREND line of 36.81 support (looks nothing like PM)
PM – nasty bearish TREND = 86.34 resistance