When we bought retail stocks in 2017 it was a deeply unpopular trade. Nobody wanted them, as apparently Amazon (AMZN) was going to take over the retail sector all by itself. There were certainly days early in the process that weren’t much fun. One of our retail stocks would report OK numbers with some positives and some negatives, and the stock would go down 7%, sending the rest of the retail stocks down 2%.
Nevertheless, the range of possibilities continued to look good, so we continued to hold and buy more. We generally invest in sad stocks, so feeling bad early on is a common part of the game.
What happened? Over the next year, consumer discretionary ended up being the top performing sector. In 2018, consumer staples have struck me as a fairly similar opportunity. I don’t mean to indicate they will be the top performer over the next year, but they should do quite well.
A primary cause of the unpopularity of staples in 2018 is the same as it was for retail in 2017. Apparently Amazon is killing staples companies as well. Like with retail, is Amazon a potential problem? Sure. Is this the first time staples companies have ever encountered a problem? Should we expect them to just fall down and die? Of course not. This is business. Some will adapt, some will die, as always happens. The companies themselves largely realize this and at least some of them are creating plans to deal with the new landscape. These are the ones that we are interested in.
How does this work? It’s a pretty common occurrence. The general opportunity lies in the fact that most people expect whatever happened in the recent past to be what happens going forward. We look at things differently. Maybe today sales are weak and margins are low, but we tend to look at the history of how the company has performed and the landscape that’s set out in front of them. Do they have a plan to improve? Is the landscape ahead easier than the landscape behind? Should margins and sales remain weak or should we expect change? We try to set up a range of likely opportunities and consider how shares are priced within that range.
In this case, staples aren’t priced bargain basement like they were in 2000, but they do represent a generally good risk/reward opportunity. This is also in contrast to many of today’s popular sectors, which are coming from a very friendly landscape and fundamentals. Should we expect that to continue? History tells us not to count on it, though many investors still seem to hold out hope. We are always looking for good risk/reward opportunities, and right now staples seem to fit that bill, as did retail in 2017.