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Are Food Stocks Still Safe Havens?

Investors are hungry for peanut butter, and for good reason.  Growth estimates for the world economy have been revised sharply lower of late.  The stock market is flailing about like a dying bull.  This is no time to buy shares of, say, banks, whose assets are difficult to price and whose role in tomorrow’s economy is uncertain.  Through Wednesday, U.S. ones had lost 18% this year, versus a 4% loss for the S&P 500.

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But peanut butter — everyone will still buy that tomorrow, recession or not.  Big consumer staples companies are up 5% for the year.  Food makers, a subset, are up 8%.

On Thursday, when the broad S&P 500 index tumbled 4.5%, peanut butter once again satisfied.  Banks, industrials and consumer discretionary companies — those that sell things we want but don’t need, like toys and lattes — lost more than 6%.  Consumer staples and food shares, meanwhile, lost less than 3%.

Peanut butter can’t pay off forever, however.  Consumer staples are now the second-most expensive sector in the S&P 500 relative to profits, behind only telecom services, with its booming wireless businesses.  Staples are more expensive than industrials, health care and even tech.  To investors, the pantry is suddenly sexier than the entertainment room.

But food and other staples are slow growers by nature.  Things we need, after all, we tend to already buy, so it’s unlikely we’ll suddenly buy much more of them in the future.  Food makers can eke out increases by raising prices, looking abroad, waiting for the population to rise or trying to come up with new ways to package food.  But they can stumble, too.  J.M. Smucker (SJM) on Thursday reported a rise in sales and profits but said that coffee sales have shrunk, excluding recent acquisitions.  Customers aren’t taking to higher coffee prices.  On a day when food outperformed, Smucker shares lost 7%.

I’ve long liked food companies in general and Smucker in particular, but the stock through Wednesday had doubled investors’ money over five years, while the S&P 500 had left it more or less unchanged.  The most defensive thing to buy if recession threatens isn’t a company that sells peanut butter; it’s a company that sells much more peanut butter than its stock price gives credit for.

The problem with peanut butter is that the trade is looking crowded.   Food stocks at 14 times forecast earnings, or roughly the stock market’s average historic price, might seem like a good deal, but not when close to one-quarter of S&P 500 members suddenly have price-to-earnings ratios in single digits.  If Thursday’s plunge has convinced you to swap your current holdings for safer shares, don’t just rush to the pantry and invest in every name you see.  Chances are good that those names will see modest markdowns soon.

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