The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

CHAPTER 5

The Consumer Staples Sector

The consumer is not a moron. She is your wife.

David Ogilvy

The U.S. consumer staples industry accounts for a major portion of the U.S. economy, amounting to expenditures of $1.6 trillion in 2010. The sector is composed of companies whose primary lines of business are food, beverages, tobacco, and other household items. Examples of these companies include Procter & Gamble, Colgate Palmolive, and Hershey. These companies have historically been characterized as non-cyclical in nature as compared with their close relative, the consumer cyclicals sector. Unlike other areas of the economy, even during economically slow times (in theory), the demand for the products made by consumer staples companies does not slow down. Some staples (e.g., discount foods, liquor, and tobacco) actually may see increased demand during slow economic times. In line with the non-cyclical nature of the demand for their products, the demand for these stocks tends to move in similar patterns.

This sector represents 10.6% of the market capitalization of the S&P 500, making it the fifth-largest sector. The sector has delivered exceptional investment returns over the 24-year period ending December 31, 2010. As demonstrated in Chapter 2, the category's return, as measured by my data, was a 11.4% annual return. As with health care, the sector offers very strong defensive characteristics. I believe there are three key characteristics that make owning many consumer staples stocks ...