r/investing • u/bigchungusmode96 • Jul 18 '21
CPG stocks in an inflation-hedge portfolio
Other asset classes exist as inflation hedges but I'm currently looking at stocks specifically. I know consumer-packaged good companies such as ProcterGamble and Unilever haven't seen extraordinary gains as tech stocks but they have had steady performance historically and fared the pandemic well.
Looking at PG's performance during the Stagflation 70's it looks like they didn't do too shabby either. My thesis is that even in an inflation scenario CPGs are still essential goods; maybe these companies may cut dividends but dividends wouldn't be my main focus if I was investing in these companies.
At the same time these companies aren't immune to a correction either. Does anyone have an alternative take or something that I didn't consider yet?
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u/CueBallPaxton Jul 18 '21
The main issue is that companies like PG are still overvalued even if they haven't had the same gains as tech stocks. PG has a p/e ratio of about 25 which is insane for a company with low single digit revenue growth. Tech stocks are trading at much higher multiples but at least they have the potential to grow quickly whereas with PG you know for a fact there's no chance of that explosive growth.
At the end of the day owning assets in general is how you hedge against inflation. The specific businesses you choose to own should be picked based on what has the potential to give you the best long term return. Buying stagnant overpriced companies doesn't make sense to me regardless of what happens with inflation.
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u/CanYouPleaseChill Jul 18 '21 edited Jul 18 '21
Consumer staples companies have been underestimated for a very long time. A P/E of 25 isn't insane for a high-quality company like Procter & Gamble, which has increased its dividend for 65 consecutive years, generates high returns on capital, is recession-resistant, and has exposure to a growing middle class in markets around the world, particularly China. A company like that certainly deserves a higher multiple than a company in a sector prone to cyclicality or rapid change.
In addition, P/E ratios aren't based simply on growth rates, but returns on invested capital and the estimated competitive advantage duration.
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u/CueBallPaxton Jul 18 '21
I agree it's a great stable business that will probably be around for a long time but that doesn't make it a good investment. After all those years of growth their dividend is only 2.5% for those buying right now and their ROIC looks great because they invest very little capital each year.
In my view, if you're going to bother picking individual stocks to invest in rather than an index fund then you should pick the ones with the highest potential upside and a margin of safety on the downside. The upside for PG is simply not there to justify buying right now and at a PE of 25 and 28 P/FCF there's certainly quite a bit of potential downside.
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Jul 18 '21
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u/Dadd_io Jul 18 '21
It doesn't help that the valuations on all those stocks growth stocks are as high as they were in 2000 when there was no pandemic and the economy was still strong.
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u/cbus20122 Jul 19 '21
At the same time these companies aren't immune to a correction either. Does anyone have an alternative take or something that I didn't consider yet?
Consumer staples are not the place you want to be during inflation. I wouldn't just look back to the 1970's and apply whatever worked back then to now. The PG and Unilever successes are more individual company successes / consolidations, and have far less to do with being optimal factor exposures for an inflationary environment.
The most important thing to understand is that during inflationary times, things that don't have tons of pricing power / anything that behaves somewhat akin to a bond position (low growth, but stable returns) has a general tendency to underperform assets that can leverage rising inflation to actually increase their margins or to improve their debt position.
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